Profitability of order and extra shift decisions The manufacturing capacity of Ritter Rotator Companys plant facility is
Sales (36,000 units at $10)........... $360,000
Variable manufacturing and selling costs........ 198,000
Contribution margin.............. 162,000
Fixed costs.................. 99,000
Operating income............... $ 63,000
A foreign distributor has offered to buy 30,000 units at $9 per unit during the second quarter of this year. Domestic demand is expected to remain the same as in the first quarter.
(a) Determine the impact on operating income if Ritter accepts this order. Assume that if the company accepts the order, it foregoes sales to regular domestic customers. What other considerations are relevant in this decision?
(b) Assume that Ritter decides to run an extra shift so that it can accept the foreign order without forgoing sales to its regular domestic customers. The proposed extra shift would increase capacity by 25% and increase fixed costs by $25,000. Determine the impact on operating income if Ritter operates the extra shift and accepts the export order. What other considerations are relevant in this decision?
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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