Question

After receiving the explanations offered in number 2 and 3, Ricardo said, "Forget that I had the Costco order. I had an even bigger order from Lands' End. It was for 500,000 units and would e filled the plant completely. I told my mother I'd settle for no commission ping and would not get any advertising allowances. been no selling and administrative costs whatsoever because Lands' End would pay for the ship Lands’ End offered $8.70 per unit. Our fixed manufacturing costs would have been spread over 2.5 million instead of 2 million units. Wouldn’t it have advantageous to accept the order? Our old fixed manufacturing costs were $2.00 per unit. The added volume would reduce the cost more than our loss on our variable costs per unit. Am I correct? What would have been the impact on total operating income if we had accepted the order?"

Answer 1

Answer:it is advantageous not to accept the order, the added volume will not reduce the cost, the operating income will reduce from $1,350,000 to $850,000

Explanation:

Profit statement

Accept order

$

Sales (8.70×500,000) 4,350,000

Less: variable cost. 2,500,000

------------------

Contribution 1,850,000

Less fixed cost. (2.00 × 500,000) ( 1,000,000)

--------------------

Profit 850,000

------------------

Do not accept the order

$

Sales. ( 8.70×500,000) 4,350,000

Less Variable cost. 2,000,000

------------------------

Contribution. 2,350,000

Less fixed cost. (1,000,000)

-----------------------

Profit. 1,350,000

-------------------------

It is advantageous not to accept the order, The added volume will not reduce the cost

The impart on total operating income if the order had been accepted is a reduction in profit from $1,350,000 to $850,000