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 $ 19.60 Labor 13.60 Variable overhead 6.60 Fixed overhead ($3,541,600 per year; 466,000 units per year) 7.60 Total $ 47.40 Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 35,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $52 per pack. The regular selling price is $76. The special order would require some modification to the basic model. These modifications would add $5.60 per unit in material cost, $3.10 per unit in labor cost, and $2.10 in variable overhead cost. Although Fairmount has the capacity to produce the 35,000 units without affecting its regular production of 466,000 units, a one-time rental of special testing equipment to meet Riverside’s requirements would be needed. The equipment rental would be $56,000 and would allow Fairmount to test up to 66,000 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.
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 | $ | 19.60 | |
| Labor | 13.60 | ||
| Variable |
6.60 | ||
| Fixed overhead ($3,541,600 per year; 466,000 units per year) | 7.60 | ||
| Total | $ | 47.40 | |
Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 35,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $52 per pack. The regular selling price is $76. The special order would require some modification to the basic model. These modifications would add $5.60 per unit in material cost, $3.10 per unit in labor cost, and $2.10 in variable overhead cost. Although Fairmount has the capacity to produce the 35,000 units without affecting its regular production of 466,000 units, a one-time rental of special testing equipment to meet Riverside’s requirements would be needed. The equipment rental would be $56,000 and would allow Fairmount to test up to 66,000 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.
Introduction:
Riverside Discount Mart, a discount shop chain, has requested 35,000 backpacks from Fairmount for a special offer Riverside is planned. Fairmount has accepted Riverside's offer of $52 per pack as a unit price. The typical retail price for this item is $76.00. A change to the basic model would be required for the special order. Material costs would increase by $5.60 per unit, labor costs would rise by $3.10 per unit, and variable overhead costs would rise by $2.10. Although Fairmount has the ability to create the 35,000 units without disrupting its usual output of 466,000, Riverside's requirements would necessitate a one-time rental of special testing equipment. Fairmount would be able to test up to 66,000 units for $56,000 in equipment rental.
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