Alpine Luggage has a capacity to produce 200,000 suitcases per year. The company is currently producing and selling 80,000 units per year at a selling price of $160 per case. The cost of producing and selling one case follows:
Variable manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . $ 64
Fixed manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Variable selling and administrative costs. . . . . . . . . . . . . . . . 32
Fixed selling and administrative costs. . . . . . . . . . . . . . . . . . 8
Total costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120
The company has received a special order for 5,000 suitcases at a price of $100 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $20 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:
Selling price per case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100
Variable manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . 64
Fixed manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Variable selling and administrative costs. . . . . . . . . . . . . . . . 20
Fixed selling and administrative costs. . . . . . . . . . . . . . . . . . 8
Net profit (loss) per case. . . . . . . . . . . . . . . . . . . . . . . . . . $ (8 )
Required
a. What is the impact on profit for the year if Alpine accepts the special order? Show computations.
b. Do you agree with the decision to reject the special order? Explain.