Exercise $4-27($Algo$)$ Special Orders $($LO $4-1,2)$

Nardin Outfitters has a capacity to produce $16,500$ of their special arctic tents per year. The company is currently producing and selling $5,000$ tents per year at a selling price of $$1,350$ per tent. The cost of producing and selling one tent follows:

Variable manufacturing costs $ $530$

Fixed manufacturing costs $135$

Variable selling and administrative costs $125$

Fixed selling and administrative costs $95$

Total costs $ $885$

The company has received a special order for $1,400$ tents at a price of $$690$ per tent from Chipman Outdoor Center. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $$54$ per tent. 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 $ $690$

Variable manufacturing costs $530$

Fixed manufacturing costs $135$

Variable selling and administrative costs $54$

Fixed selling and administrative costs $95$

Net profit $($loss$)$ per case $ $(124)$

Required:

a$.$ What is the impact on profit for the year if Nardin Outfitters accepts the special order?

$($All revenues and costs in $$000)$ Difference

Status Quo $5000$ Units Alternative $6400$ Units

Sales revenue $$4,425,000\mathrm{.}0$ $$5,391,000\mathrm{.}0$

Variable costs:

Manufacturing $2,650,000\mathrm{.}03,392,000\mathrm{.}0$

Selling and administrative $625,000\mathrm{.}0864,000\mathrm{.}0$

Contribution margin $$1,150,000\mathrm{.}0$ $$1,135,000\mathrm{.}0$

Fixed costs $1,150,000\mathrm{.}01,150,000\mathrm{.}0$

Operating profit $$0\mathrm{.}0$ $$(15,000\mathrm{.}0)$

bRequired B

Do you agree with the decision to reject the special order?

Do you agree with the decision to reject the special order?