Question

Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit.

Materials	$	36.00
Labor		14.00
Variable overhead		4.00
Fixed overhead ($1,944,000 per year; 108,000 units per year)		18.00
Total	$	72.00

Simpson Company has approached Andreasen with an offer to buy 9,200 thermostats at a price of $60 each. The regular price is $100. Andreasen has the capacity to produce the 9,200 additional units without affecting its current production of 108,000 units. Simpson requires that each unit use its branding, which requires a more expensive label, resulting in an additional $2.00 per unit material cost. The labor cost of affixing the label will be the same as for the current models. The Simpson order will also require a one-time rental of packaging equipment for $34,200.

Required:

a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen's profits for the year.
b. Do you agree with the decision to accept the special order?
c. Considering only profit, determine the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available.

Answer 1

a.

Incremental Revenue	$      552,000
Incremental Expenses
Material	$      331,200
Labor	$      128,800
Variable Overhead	$         36,800
Label	$         18,400
Rental	$         34,200
Total Incremental Expenses	$      549,400
Incremental Income (Loss)	$           2,600

b. The special order should be accepted

c.
Contribution Margin per unit = $60 - 56 = $4 per unit
Minimum Quantity = $34200 / 4 = 8550 units