Question

Whispering Winds Manufacturing has an annual capacity of 81,000 units per year. Currently, the company is making and selling 78,200 units a year. The normal sales price is $102 per unit, variable costs are $65 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 5,400 units at $70 per unit. Whispering Winds's cost structure should not change as a result of this special order. By how much will Whispering Winds's income change if the company accepts this order?

Answer 1

Answer:

Net loss from accepting the order  $(56,200 )

Explanation:

Note that Whispering Winds Manufacturing currently has excess capacity

Excess capacity = 81,000 - 78,200 = 2800  units

The relevant cash flows associated with this special order are as follows:

1. The increase in contribution from meeting part of the offer from the excess capacity
2. Opportunity cost associated with meeting the part of the special order from existing sales.

Note that the special order would be met as follows

2800 from the excess capacity

2600 from existing sales

5400

                                                                                       $

Total contribution from special order:

(70-65) × 5400                                                              27000

Contribution lost from selling 2,600

at a reduced price:

(102-70)  × 2,600                                                        (83,200)

Net loss from accepting the order                             (56,200 )