Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label.
Question:
Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label. The cost of one of his backpacks is as follows:
Materials | ps | 18.70 | ||
Manpower of labour | 12.70 | |||
Variable Overhead | 5.70 | |||
Fixed overhead ($3,061,900 per year; 457,000 units per year) | 6.70 | |||
Total | ps | 43.80 | ||
Riverside Discount Mart, a low-priced store chain, has asked Fairmount to supply 26,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $47 per package. Regular retail price is $67. Special order would require some modification to the basic model. These modifications would add $4.70 per unit in material cost, $2.20 per unit in labor cost, and $1.20 in variable overhead. While Fairmount has the capacity to produce the 26,000 units without impacting its regular production of 457,000 units, a one-time lease of special test equipment would be required to meet Riverside's requirements. The equipment rental would be $64,800 and would allow Fairmount to test up to 57,000 units.
Required:
a. Prepare a schedule to show the impact of fulfilling Riverside's order on Fairmont's profits for the year.
b. Do you agree with the decision to accept the special request?
C. Considering only profit, determine the minimum number of backpacks in the special order that would make it profitable.
Fundamentals of Cost Accounting
ISBN: 978-1259565403
5th edition
Authors: William Lanen, Shannon Anderson, Michael Maher