Chapter 13, Problem 29P

a.

To determine

Explain whether Corporation L should accept the special order or not based on quantitative factors. Explain with the calculations and identify the amount that would increase or decrease the profitability.

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Outsourcing: It can be termed as conveying all or part of an activity to a supplier or a provider. While outsourcing was initially limited to fundamental activities, it as of now invades the administration of numerous organizations.

Opportunity cost: Opportunity cost is the forfeit of certain benefits such as cost savings, incomes, which is surrendered by not picking an option. Opportunity costs are applicable in decisions where the acknowledgment of one option disqualifies the likelihood of selecting different alternatives.

The reasons on whether Corporation L should accept the special order is as follows:

As Corporation L is not obligated to pay the sales commissions in the current scenario, the company should remove that product from the consideration. The majority of the fixed costs must be rejected from consideration since they cannot be avoided irrespective of whether the special order is selected or eliminated.

Determine the contribution margin:

$\begin{array}{c}ContributionM\arg in=\left[\begin{array}{l}\mathrm{Re}venue-Material\mathrm{Cos}ts-Labor\mathrm{Cos}ts-\\ ManufacturingOverhead-ShippingandHandling\end{array}\right]\\ =\left[\begin{array}{l}\left(\$5.50\times 5,000\right)-\left(\$2.25\times 5,000\right)-\left(\$1.00\times 5,000\right)-\\ \left(\$1.00\times 5,000\right)-\left(\$0.25\times 5,000\right)\end{array}\right]\\ =\left[\$27,500-\$11,250-\$5,000-\$5,000-\$1,250\right]\\ =\$5,000\end{array}$

Therefore the contribution margin is $5,000.

Conclusion

From the results obtained above, the income is higher than the avoidable costs. Hence the special order should be accepted.

Therefore the special order should be accepted.

b.

To determine

Explain whether Corporation L should buy the calculators or continue to make them. Identify more or less cost incurred to buy the calculators than to make them. If there is an increase in sales (60,000 units), explain whether the answer will change or not.

Explanation of Solution

The following items must be rejected from the contemplation since they do not contrast between the alternatives.

• Revenue
• Shipping and handling
• Sales commissions
• Advertising costs
• Company expenses

Determine the total cost if the company continues to make them at 40,000 units:

Particulars	Making cost in $	Buying cost in $
Unit level costs:
Purchase price $\left(40,000\times \$5.60\right)$		$224,000
Material cost $\left(40,000\times \$2.25\right)$	$90,000	$0
Labor cost $\left(40,000 \times \$1.00\right)$	$40,000	$0
Manufacturing overhead $\left(40,000 \times \$1.00\right)$	$40,000	$0
Fixed expenses:
Salaries of production supervisor	$60,000	$0
Total cost incurred	$230,000	$224,000

Table (1)

Therefore the total cost if the company continues to make them at 40,000 units is $230,000 and to buy them at 40,000 units is $224,000.

From the results obtained above, at a sales volume of 40,000 units, Corporation L should buy the calculators.

Therefore, Corporation L should buy the calculators.

Determine the total cost if the company continues to make them at 60,000 units

Particulars	Making cost in $	Buying cost in $
Unit level costs:
Purchase price $\left(60,000\times \$5.60\right)$		$336,000
Material cost $\left(60,000\times \$2.25\right)$	$135,000	$0
Labor cost $\left(60,000 \times \$1.00\right)$	$60,000	$0
Manufacturing overhead $\left(60,000 \times \$1.00\right)$	$60,000	$0
Fixed expenses:
Salaries of production supervisor	$60,000	$0
Total cost incurred	$315,000	$336,000

Table (2)

Therefore the total cost if the company continues to make them at 60,000 units is $315,000 and to buy them at 60,000 units is $336,000.

From the results obtained above, at a sales volume increased to 60,000 units, it is less expensive to make the units than to purchase them. This outcome happens due to the salary of production supervisor fixed or the fixed cost, which is spread over a bigger number of units, consequently lessening the average cost per unit.

Therefore the answer changes if the units change to 60,000 units.

c.

To determine

Explain whether the calculator division should be eliminated from the company’s operations. Identify the amount that would increase or decrease the segment’s profitability after elimination.

Explanation of Solution

Determine the amount of impact on profitability:

The company expenses must be rejected from contemplation since they do not vary between the alternatives.

Revenue $\left(40,000\text{ units}\times \$9.00\right)$	$360,000
Variable costs:
Materials cost $\left(40,000\times \$2.25\right)$	($90,000)
Labor cost $\left(40,000\times \$1.00\right)$	($40,000)
Manufacturing overhead $\left(40,000\times \$1.00\right)$	($40,000)
Shipping and handling $\left(40,000\times \$0.25\right)$	($10,000)
Sales commissions $\left(40,000\times \$1.00\right)$	($40,000)
Contribution margin	$140,000
Fixed expenses
Advertising costs	($20,000)
Salary of production supervisor	($60,000)
Impact on profitability	$60,000

Table (3)

Therefore the amount of profit is $60,000.

From the results obtained above, the study demonstrates that the sale and production of calculators is contributing $60,000 to the productivity of the company. The present net loss that shows up on the income statement results from the general company expenses that would proceed irrespective of whether the segment is rejected. Hence, Corporation L should continue to work the segment.

Therefore, Corporation L should continue the calculator division.