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4 Analyze special order decision (Learning Objective 3) O Products manufactures t-shirts. It has the following costs when its production level is 100,000 units (t-shirts): Total costs for 100,000 units Direct materials ................. $ 320,000 Direct labor ............ 40,000 Variable manufacturing overhead ...... 85,000 Fixed manufacturing overhead 120,000 Total manufacturing costs ......... $ 565,000 The company's relevant range extends to 115,000 units. Orr has received a special order for 10,000 t-shirts at a special price of $50,000 for the entire order. The special order t-shirt would use a fabric that is less expensive than the standard fabric used by Orr, to save so.50 per t-shirt in direct materials when manufacturing this special order. Orr has the excess capacity to manufacture this special order. Its total fixed costs will not be impacted by the special order. What will happen to Orr's operating income if it accepts this special order? 58-5 Special order decision (Learning Objective 3) Shilling Manufacturing produces and sells oil filters for $3.25 each. A retailer has offered to purchase 20,000 oil filters for $1.55 per filter. Of the total manufacturing cost per filter of $2.10, $1.30 is the variable manufacturing cost per filter. For this special order, Shilling would have to buy a special stamping machine that costs $8,000 to mark the customer's logo on the special order oil filters. The machine would be scrapped when the special order is complete. This special order would use manufacturing capacity that would other- wise be idle. No variable nonmanufacturing costs would be incurred by the special order. Regular sales would not be affected by the special order. Would you recommend that Shilling accept the special order under these conditions? LHAPIER 8 a department (Learning Ubjective 4) Men's, Women's, and Accesso- dable building depreciation and 58-6 Decide whether to discontinue a department (Leamin Devine Fashion in Chicago operates three departments: Men's, Women's eine Fashion allocates all fixed expenses (unavoidable building deprecia ced on each department's square footage. Departmental operating ince utilities) based on each department's sau data for the third quarter of the current year are as follows: Devine Fashions Product Line Contribution Margin Income Statement For the Year $ Men's 105,000 58,000 58.000 47,000 25,000 22,000 7 Sales revenue 8 Less: Variable expenses 9 Contribution margin 10 Less: Fixed expenses 11 Operating income Product lines Women's $ 52,000 28,000 $ 24,000 22,000 $ 2,000 Accessories $ 101,000 90,000 $ 11,000 26,000 $ (15,000) Company Total $ 258,000 $ 176,000 $ 82,000 $ $ 9,000 $ 73,000 The store will remain in the same building regardless of whether any of the depart- ments are discontinued. Should Devine Fashion discontinue any of the departments? Give your reason. 58-7 Discontinue a department: Revised information (Learning Objective 4) Consider Devine Fashion from 58-6. Assume that the fixed expenses assigned to each de partment include only direct fixed costs of the department (rather than unavoidable fixed costs as given in 58-6): Salary of the department's manager Cost of advertising directly related to that department If Devine Fashion discontinues a department, it will not incur these fixed expenses. Under these circumstances, should Devine Fashion discontinue any of the departments? Give your reason. Special order decisions given two scenarios Specia Relevant Costs for Short-Term Decisi E8-21A (Learning Objective 3) Suppose the Bas ose the Baseball Hall of Fame in Cooperstown, New York, has approached Slectibles & More with a special order. The Hall of Fame wants to purchase 53,000 seball card packs for a special promotional campaign and offers $0.32 per pack, otal of $16,960. Collectibles & More's total production cost is $0.52 per pack, as a total of $16,960.C follows: Variable costs: Direct materials..... Direct labor.... $0.11 Variable overhead. 0.06 0.10 Fixed overhead 0.25 Total cost .................. $0.52 Collectibles & More has enough excess capacity to handle the special order. Requirements 1. Prepare an incremental analysis to determine whether Collectibles & More should ac- cept the special sales order assuming fixed costs would not be affected by the special order. 2. Now assume that the Hall of Fame wants special hologram baseball cards. Collect- ibles & More must spend $5,100 to develop this hologram, which will be useless after the special order is completed. Should Collectibles & More accept the special order under these circumstances? Show your analysis. CHAPTER 8 losses. They are con countants have pre- F8-23A Decide whether to discontinue a product line (Learning Objective 4) Top managers of Vermont Flooring are alarmed by their operating losses. Th sidering dropping the laminate flooring product line. Company accountant pared the following analysis to help make this decision: Vermont Flooring Product Line Contribution Margin Income Statement For the Year Product lines Laminate Wood flooring flooring Company Total 5 306,000 $ 128,000 $ 434 00 156,000 82,000 238,000 $ 150,000 $ 46,000 $ 196,000 7 Sales revenue 8 Less: Variable expenses 9 Contribution margin 10 Less fixed expenses: 11 Manufacturing 12 Marketing and administrative 13 Operating income (loss) 75,000 51.000 24,000$ 55,000 19,000 (28,000) $ 130,000 70.000 4.000) $ 14 Total fixed costs will not change if the company stops selling laminate flooring. Requirements 1. Prepare an incremental analysis to show whether Vermont Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $28,000 to operating income? Explain. 2. Assume that the company can avoid $32,000 of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring. 3. Now, assume that all of the fixed costs assigned to laminate flooring are direct costs and can be avoided if the company stops selling laminate flooring. HOW marketing has concluded that wood flooring sales would be adversely affe discontinuing the laminate flooring line (retailers want to buy both from the plier). Wood flooring production and sales would decline 10%. What should pany do? aversely affected by both from the same sup

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