Joe Smith has owned and operated Smith's Tool and Die for 40 years. Currently, he is only making one part, RL-5 which is a small electrical relay. He has a 2-year contract to provide 30,000 parts per month to Ford Motor. Unfortunately, Joe got quite sick and his son, Mike, has had to come in and run the business. Mike is disappointed when he finds the following monthly information about the RL-5 part Per unit 30,000 units Sales Price: $ 22.00 660,000 Variable manufacturing costs $ 14.00 420,000 Variable selling costs $ 2.00 60,000 Fixed manufacturing overhead 150,000 Fixed administrative/selling costs 60,000 Operating income (30,000) Smith’s Tool and Die has the capacity to produce 100,000 units of the RL-5 part per month. Mike comes to you to see what can be done about the current losses Smith’s Tool and Die is experiencing. You and Mike determine that there are three alternatives to consider. Mike mentions that his friend’s dad, Sam, also owns a tool shop and supplies the RL-5 part to other automotive businesses. Sam’s business is doing very well and can’t keep up with current production. Sam offers to purchase 50,000 units of RL-5 from Mike for $15.00 per unit. Since this is Mike’s deal, not additional selling costs will be incurred. How much profit/loss will Mike realize if he accepts Sam’s special order for 50,000 units? Show computations Incremental revenue: Incremental costs (please list each cost individually) Are there any qualitative issues with accepting this special order?
Joe Smith has owned and operated Smith's Tool and Die for 40 years. Currently, he is only making one part, RL-5 which is a small electrical relay. He has a 2-year contract to provide 30,000 parts per month to Ford Motor. Unfortunately, Joe got quite sick and his son, Mike, has had to come in and run the business. Mike is disappointed when he finds the following monthly information about the RL-5 part
|
Per unit |
30,000 units |
|
|
Sales Price: |
$ 22.00 |
660,000 |
|
Variable |
$ 14.00 |
420,000 |
|
Variable selling costs |
$ 2.00 |
60,000 |
|
Fixed manufacturing |
|
150,000 |
|
Fixed administrative/selling costs |
|
60,000 |
|
Operating income |
(30,000) |
Smith’s Tool and Die has the capacity to produce 100,000 units of the RL-5 part per month.
Mike comes to you to see what can be done about the current losses Smith’s Tool and Die is experiencing. You and Mike determine that there are three alternatives to consider.
- Mike mentions that his friend’s dad, Sam, also owns a tool shop and supplies the RL-5 part to other automotive businesses. Sam’s business is doing very well and can’t keep up with current production. Sam offers to purchase 50,000 units of RL-5 from Mike for $15.00 per unit. Since this is Mike’s deal, not additional selling costs will be incurred.
How much
Show computations
Incremental revenue:
Incremental costs (please list each cost individually)
Are there any qualitative issues with accepting this special order?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
