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	$	18.30
Labor		12.30
Variable overhead		5.30
Fixed overhead ($2,853,900 per year; 453,000 units per year)		6.30
Total	$	42.20

Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 22,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $45 per pack. The regular selling price is $63. The special order would require some modification to the basic model. These modifications would add $4.30 per unit in material cost, $1.80 per unit in labor cost, and $0.80 in variable overhead cost. Although Fairmount has the capacity to produce the 22,000 units without affecting its regular production of 453,000 units, a one-time rental of special testing equipment to meet Riverside’s requirements would be needed. The equipment rental would be $70,400 and would allow Fairmount to test up to 53,000 units.

Required:

a. Prepare a schedule to show the impact of filling the Riverside order on Fairmont’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 backpacks in the special order that would make it profitable.
  

Complete this question by entering your answers in the tabs below.

• Required A
• Required B
• Required C

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.)

	(All Costs in Thousands of Dollars)
	Status Quo 453,000 Units	Alternative 475,000 Units	Difference
Sales revenue	$28,539.0			higher
Less variable costs:
Materials	8,289.9			higher
Labor	5,571.9			higher
Variable overhead	2,400.9			higher
Total variable cost	$16,262.7	$0.0		higher
Contribution margin
Less: Fixed costs
Operating profit (loss)

• Please show your work for the alternative calculations. I am having trouble figuring out the correct calculations. Thank you.

Answer 1

							22000
		a)				Status	Alternative	Difference
						quo
per unit						453,000	475,000
order	original
45	63		Sales revenue			28539	29529	990	higher
			less variable costs:
22.6	18.3		Materials			8289.9	8787.1	497.2	higher
14.1	12.3		Labor			5571.9	5882.1	310.2	higher
6.1	5.3		Variable overhead			2400.9	2535.1	134.2	higher
42.8	35.9		total variable cost			16262.7	17204.3	941.6	higher
2.2	27.1		contribution margin			12276.3	12324.7	48.4	higher
			less:Fixed costs			2853.9	2924.3	70.4	higher
			operating profit(loss)			9422.4	9400.4	22	lower
		b)	no
		c)	The minimum Quality of backpacks				32000	units