Western Classics Publishing Company produces updated versions of literary classics targeted for children. Its bookbinding machines are capable of producing 50 books per hour. The unit-related cost of producing books is $2.50, and Western Classics sells its books for $9.50 each. Reading Ready Publishing has asked the company to produce 10,000 copies of a book for $7.50. Western Classics estimates that unit-level costs for the new book will be $3.00, and due to the size of the book, its binding machines will only be able to produce 20 books per hour. Western Classics has a total of 5,000 machine hours of capacity. In addition, to complete the special order, Western Classics will have to purchase an additional special-purpose machine that will cost $8,000.Required:Assume that existing demand
for Western Classics's children's classics is 230,000 units and that the special order has to be either taken in full or rejected. Prepare an analysis that indicates whether or not the special order should be accepted.
What will be an ideal response?
| Total machine hours available: | 5,000 | ||
| Machine hours needed to satisfy existing demand (230,000/50) | 4,600 | ||
| Machine hours available for special order | 400 | ||
| Machine hours needed for special order (10,000/20) | 500 | ||
| Contribution generated by special order (($7.50 ? $3.00) × 10,000) | $ | 45,000 | |
| Less incremental fixed costs | 8,000 | ||
| Increase in income from special order | 37,000 | ||
| Less contribution lost when 100 hours taken from existing sales ((100 × 50) × $7) | (35,000 | ) | |
| Net increase in income if special order is accepted | $ | 2,000 | |
| Therefore, the special order should be accepted |
You might also like to view...
The entry required to record start-up and organization costs will cause a decrease in net income for the period
Indicate whether the statement is true or false
Robert is Sarah’s assistant. Each morning, Robert presents a list of relevant updates and/or messages left for Sarah from the previous workday when he brings her a coffee. Robert’s communication to Sarah is an example of ______ communication.
a. downward b. upward c. horizontal d. informal
Which of the following is true of creating a sole proprietorship?
A) No government approval is required. B) Federal taxation is levied upon sole proprietorship. C) No licenses are required to do business within a city or state. D) Special permission must be obtained to receive a sole proprietorship status.
There are three categories of simulation models: Monte Carlo, operational gaming, and systems simulation
Indicate whether the statement is true or false