Question

Alpine Luggage has a capacity to produce 450,000 suitcases per year. The company is currently producing and selling 370,000 units per year at a selling price of $402 per case. The cost of producing and selling one case follows:

Variable manufacturing costs	$	158
Fixed manufacturing costs		42
Variable selling and administrative costs		80
Fixed selling and administrative costs		20
Total costs	$	300

The company has received a special order for 40,000 suitcases at a price of $251 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $51 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:

Selling price per case	$	251
Variable manufacturing costs		158
Fixed manufacturing costs		42
Variable selling and administrative costs		51
Fixed selling and administrative costs		20
Net profit (loss) per case	$	(20	)

Required:

a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

Answer 1

	(All costs in $000)
	Status Quo	Alternative
	370,000 Units	410,000 Units	Difference
Sales revenue	148740	158780	10040	Higher
Variable costs:
Manufacturing	58460	64780	6320	Higher
Selling and administrative	29600	31640	2040	Higher
Contribution margin	60680	62360	1680	Higher
Fixed costs	22940	22940	0	None
Operating profit	37740	39420	1680	Higher
Formulas used:
	370,000 Units	410,000 Units
Sales revenue	=370*402	=148740+(40*251)
Variable costs:
Manufacturing	=370*158	=58460+(40*158)
Selling and administrative	=370*80	=29600+(40*51)
Contribution margin	=148740-58460-29600	=158780-64780-31640
Fixed costs	=370*(42+20)	=370*(42+20)
Operating profit	=60680-22940	=62360-22940