Dunder Mifflin, Inc. is a paper sales company located in New York City. Michael Scott, regional manager of the Scranton branch, is considering an offer from Karen Filippelli, regional manager of the Utica branch. Karen's branch operates below the maximum capacity and has just received an order to produce 8,000 units of one of its products for its new customer in Stamford. The production of these products requires materials produced by Michael's branch. Every unit produced by Karen's branch requires two materials. The problem is the price these new customers are willing to pay is far below the usual price. To get a reasonable profit on orders, Karen needs a price compromise from Michael's branch. Karen offers to pay full production costs for the materials. She has provided the following unit cost and price information on Stamford customers' special orders, not including the material costs from Michael's branch: The normal price of the material from Michael's branch is $3,5 per unit. Its full production cost is $2,8 which consists of $1,6 variable costs and $1,2 fixed costs. Karen argues that paying $3,5 per material would result in losses on her branch. Michael is interested in the offer because his branch also does not operate at maximum capacity (Karen's order would not use all remaining capacity. 

Required: 

1. Should Michael accept the special order at a selling price of $2,8 per unit? By how much will his branch profit increase or decrease if the order is accepted? By how much will the profits of Karen's branch change if Michael agrees to supply the materials at $2,8? 

2. Suppose that Michael offers to supply the materials at $3 and the price is not negotiable. Should Karen accept the offer? If Karen accepts the offer, by how much will Michael's branch profit increase or decrease? 

3. Now assume that there is no excess capacity in Michael's branch and he refuses to sell the materials for less than the full price. Should Karen still accept the special order? Show your calculations!

Transcribed Image Text:

Selling price Less cost: Direct materials Direct labor Variable overhead Fixed overhead Operating profit $ 480 $26 $ 10 $3 $4,5 $4,5 Selling price Less cost: Direct materials Direct labor Variable overhead Fixed overhead Operating profit $ 480 $26 $ 10 $3 $4,5 $4,5

Answer rating: 100% (QA)

1 2 3 Offer price Less Relevant cost Variable cost Inrease in profit Number of units 80002 Total inc... View the full answer