Question

the smell company sells men's cologne. They currently purchase the cologne from a supplier in Cambodia and put their lables on teh bottles in thier factory. The cologne costs them $2.50 per bottle and they attach their own lable on teh bottle at a cost of $1.00 per bottle for the labels. Their current sales are 1,000,000 bottles at $5 per bottle. Their fixed cost per bottle that they sell is $.40 per bottle. In addition, their equipment is currently idel approximately one third of the time.

They currently received an offer from a company to purchase 200,000 bottles of their cologne for $4.50 per bottle. In turn, that same company wants Smell Co. to put a special label on the bottles that will cost $1.25 instead of thier normal cost of $1.00 per lable. Should they accept the offer and what would their profit be before and after the order should they decide to accept it?

I need this ASAP please.... with work shown... so i can actually explain this to my son who has the test later today. thanks.

Answer 1

before the order is accepted
Sales (1000000*$5)	$5,000,000
Less:
Cologne cost ($2.5*1000000)	2500000
Labelling cost (1*1000000)	1000000
Variable cost	$1,500,000
Less: fixed cost	400000
Net Operating Income	$1,100,000
As it has 1/3 i.e for 300000 bottlesidle capacity
hence fixed cost becomes irrelevant for special order
Sales (200000*4.5)	$900,000
Less:
Cologne cost ($2.5*200000)	500000
Labelling cost (1.25*200000)	250000
Variable cost	$150,000
Less: fixed cost	0
Net Operating Income	$150,000
Profit before the order	$1,100,000
Profit after the order	$1,250,000
(1100000+150000)
Yes the order should be accepted as it increases
the overall profit.
If any doubt please comment