Question

Blowing Sand Company has just received a one-time offer to purchase 10,000 units of its Gusty model for a price of $22 each. The Gusty model normally sells for $30 and costs $26 to produce ($17 in variable costs and $9 of fixed overhead). Because the offer came during a slow production month, Blowing Sand has enough excess capacity to accept the order.
Required:
a. Should Blowing Sand accept the special order?
b. Calculate the increase or decrease in short-term profit from accepting the special order.

Answer 1

Answer:

a. Accept the order

b. Increase in short-term profit of $50,000

Explanation:

Note : Blowing Sand has "enough excess capacity" this means that fixed cost will be the same in the range or they will be ocurred whether or not the special order is accepted.

Therefore fixed costs are Irrelevant for this decision.

Incremental Costs and Revenues - accept the special order

Sales ( 10,000 units × $22 each)                               $220,000

Less Variable Costs ( 10,000 units × $17each)         ($170,000)

Net Income                                                                  $50,000

The special order will result in an increase in short term profit of $50,000. Therefore, Blowing Sand Company should accept the order.

Answer 2

Answer:

Blowing Sand Company should accept the special order

The order increases short-term profit by $50,000

Explanation:

The rationale for accepting or rejecting the order is hinged on the need to calculate the contribution to recovering fixed costs and making an extra net income

Sales value of the order (10,000*$22)   $220,000

Variable costs($17*10,000)                     ($170,000)

Extra contribution                                    $50,000

The order brings an extra contribution of $50,000,since the fixed costs would be incurred regardless of whether the special order is taken or not,it would be wise to accept the order as it would increase profit by$50,000