Question

Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label. The cost of one of its backpacks follows:

Materials	$	19.70
Labor		13.70
Variable overhead		6.70
Fixed overhead ($3,595,900 per year; 467,000 units per year)		7.70
Total	$	47.80

Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 36,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $53 per pack. The regular selling price is $77. The special order would require some modification to the basic model. These modifications would add $5.70 per unit in material cost, $3.20 per unit in labor cost, and $2.20 in variable overhead cost. Although Fairmount has the capacity to produce the 36,000 units without affecting its regular production of 467,000 units, a one-time rental of special testing equipment to meet Riverside’s requirements would be needed. The equipment rental would be $73,800 and would allow Fairmount to test up to 67,000 units.

Required:

a. Prepare a schedule to show the impact of filling the Riverside order on Fairmont’s profits for the year. (Enter your answers in thousands rounded to 1 decimal place. (i.e., 5,400,400 should be entered as 5,400.4). Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

b. Do you agree with the decision to accept the special order?

	Yes
	No

c. Considering only profit, determine the minimum quantity of backpacks in the special order that would make it profitable. (Do not round intermediate calculations.)

Answer 1

A. Schedule

	Status Quo	With special order	Difference
Revenue	35,959,000	37,867,000	1,908,000	Higher
Costs
Material	9,199,900	10,114,300	914,400	higher
Labor	6,397,900	7,006,300	608,400	higher
Variable overhead	3,128,900	3,449,300	320,400	higher
Fixed overhead	3,595,900	3,669,700	73,800	higher
Total	22,322,600	24,239,600	1,917,000	higher
Operating profit	13,636,400	13,627,400	(9,000)	lower

B.no, since loss. Hence, should not be accepted

C.minimu quantity = fixed cost/contribution margin per unit

= 73,800/1.8

= 41,000 backpacks