Problem Set A D. Lawrance designs and manufactures fashionable men's clothing. For the coming year, the com- pany has scheduled production of 40,000 suede jackets. Budgeted costs for this product are as follows. Unit Costs (40,000 units) Total $50 $2,000,000 20 800,000 Variable manufacturing costs Variable selling expenses. 10 400,000 Fixed manufacturing costs 200,000 Fixed operating expenses $85 $3,400,000 Total costs and expenses The management of D. Lawrance is considering a special order from Discount Apparel for an additional 10,000 jackets. These jackets would carry the Discount Apparel label, rather than the D Lawrance label. In all other respects, they would be identical to the regular D. Lawrance jackets. Although D. Lawrance regularly sells its jackets to retail stores at a price of $150 each, Dis- count Apparel has offered to pay only $80 per jacket. However, because no sales commissions would be involved with this special order, D. Lawrance will incur variable selling expenses of only $5 per unit on these sales, rather than the $20 it normally incurs. Accepting the order would cause no change in the company's fixed manufacturing costs or fixed operating costs. D. Lawrance has enough plant capacity to produce 55,000 jackets per year. Instructions a. Using incremental revenue and incremental costs, compute the expected effect of accepting this special order on D. Lawrance's operating income. b. Briefly discuss any other factors that you believe D. Lawrance's management should con sider in deciding whether to accept the special order. Include nonfinancial as well as financia. considerations.
Problem Set A D. Lawrance designs and manufactures fashionable men's clothing. For the coming year, the com- pany has scheduled production of 40,000 suede jackets. Budgeted costs for this product are as follows. Unit Costs (40,000 units) Total $50 $2,000,000 20 800,000 Variable manufacturing costs Variable selling expenses. 10 400,000 Fixed manufacturing costs 200,000 Fixed operating expenses $85 $3,400,000 Total costs and expenses The management of D. Lawrance is considering a special order from Discount Apparel for an additional 10,000 jackets. These jackets would carry the Discount Apparel label, rather than the D Lawrance label. In all other respects, they would be identical to the regular D. Lawrance jackets. Although D. Lawrance regularly sells its jackets to retail stores at a price of $150 each, Dis- count Apparel has offered to pay only $80 per jacket. However, because no sales commissions would be involved with this special order, D. Lawrance will incur variable selling expenses of only $5 per unit on these sales, rather than the $20 it normally incurs. Accepting the order would cause no change in the company's fixed manufacturing costs or fixed operating costs. D. Lawrance has enough plant capacity to produce 55,000 jackets per year. Instructions a. Using incremental revenue and incremental costs, compute the expected effect of accepting this special order on D. Lawrance's operating income. b. Briefly discuss any other factors that you believe D. Lawrance's management should con sider in deciding whether to accept the special order. Include nonfinancial as well as financia. considerations.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
21.1A
Transcribed Image Text:**Chapter 21 Incremental Analysis**
**Problem Set A**
**D. Lawrance: Accepting a Special Order**
The management of D. Lawrance is considering a special order from Discount Apparel for an additional 10,000 jackets. These jackets would carry the Discount Apparel label rather than the D. Lawrance label. Although D. Lawrance regularly sells its jackets for $150 each, Discount Apparel has offered a price of $110 each. This price is below the regular selling price. However, because no sales commissions would have to be paid, D. Lawrance will incur variable selling expenses of only $5 per unit on these sales rather than the $20 it normally incurs. Accepting the order would cause no change in the company’s fixed manufacturing or fixed operating costs. D. Lawrance has enough plant capacity to produce 55,000 jackets per year.
**Instructions**
a. Using incremental revenue and incremental costs, compute the expected effect of accepting this special order on D. Lawrance’s operating income.
b. Briefly discuss other factors that you believe D. Lawrance’s management should consider in deciding whether to accept the special order. Include nonfinancial as well as financial considerations.
**Cost Breakdown**
| Unit Costs (40,000 units) | Cost per Unit | Total Cost |
|------------------------------|---------------|--------------|
| Variable manufacturing costs | $50 | $2,000,000 |
| Variable selling expenses | $20 | 800,000 |
| Fixed manufacturing costs | $10 | 400,000 |
| Fixed operating expenses | $5 | 200,000 |
| Total costs and expenses | $85 | $3,400,000 |
---
The table provided breaks down the costs associated with producing 40,000 units. Variable manufacturing costs are $50 per unit, resulting in a total cost of $2,000,000. Variable selling expenses are $20 per unit, totaling $800,000. Fixed manufacturing costs are $10 per unit, totaling $400,000, and fixed operating expenses are $5 per unit, totaling $200,000. This brings total costs and expenses to $85 per unit, with a grand total of $3,400,000 for the 40,000 units.
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