Problem 1 Cost Volume Profit Analysis and Comparisons - Quantitative Business Decision Analysis Watermark Corporation manufactures faucets. Several weeks ago, the firm received a special-order inquiry from Vale, Inc. Vale desires to market a faucet similar to Watermark's model no. 55 and has offered to purchase 3,200 units. The following data are available: Cost data for Watermark's model no. 55 faucet: direct materials, $48; direct labor, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour). The normal selling price of model no. 55 is $180; however, Vale has offered Watermark only $124 because of the large quantity it is willing to purchase. Vale requires a modification of the design that will allow a $7 reduction in direct-material cost. Watermark's production supervisor notes that the company will incur $8,444 in additional set-up costs and will have to purchase a $22,700 special device to manufacture these units. The device will be discarded once the special order is completed. Total manufacturing overhead costs are applied to production based on direct labor hours. Total budgeted overhead is $840,000. This figure is based on budgeted yearly fixed overhead of $624,000, a budgeted variable overhead of $216,000, and a budgeted activity level of 24,000 direct labor hours. Watermark will allocate $11,000 of existing fixed administrative costs to the order as "...part of the cost of doing business." Required: (a) One of Watermark's staff accountants wants to reject the special order because "financially, it's a loser. Show calculations to determine the incremental profit or loss on this special order to support your answer. (a) Watermark # 55 Faucet Today Cost Driver Sales Price/unit DM Cost/unit #3 1 #2 DL Cost req #3 2 hours $ 15.00 per unit Variable MO req #4 2 hours $ 35.00 per unit VOH$ VMOH/DLH 24,000 FMO$ FMO $ 624,000 9.00 per DLH Vale Special Order for 3200 Units Sales Income Statement $124/unit #5 DM DL Adjusted Standard VMO Standard CM CM % FIXED COSTS: Adjusted Set-up Cost: Special Device Other Fixed Cost FMO Standard Net Income b) If Watermark currently has no excess capacity, should the order be rejected? (Assume that Watermark cannot acquire excess capacity via overtime or any other way.) Briefly explain. Choose one to explain your conclusion: "Accept" or "Reject" Why? #9 Choose one: A B Project Vale's set-up costs are below direct material cost Project Vales modification design will delay processing # 10 C Project Vale incremental profit is able to cover existing fixed costs D Project Vale incremental profit is unable to cover existing fixed costs #6 #7 #8 Choose one: