Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit: Materials $ 36.00
Labor 14.00
Variable overhead 4.00
Fixed overhead ($1,800,000 per year; 100,000 units per year) 18.00
Total $ 72.00
Simpson Company has approached Andreasen with an offer to buy 7,500 thermostats at a price of $60 each. The regular price is $100. Andreasen has the capacity to produce the 7,500 additional units without affecting its current production of 100,000 units. Simpson requires that each unit use its branding, which requires a more expensive label, resulting in an additional $2 per unit material cost. The labor cost of affixing the label will be the same as for the current models. The Simpson order will also require a one-time rental of packaging equipment for $20,000.
Required:
a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen’s profits for the year. (Enter your answers in thousands (i. e., 5,400,000 should be entered as 5,400). Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)
Status quo 100,000 units Alternative 107,500 units Difference Higher or lower

Sales Revenue ? ? ? ?
Less: variable cost ? ? ? ?
Materials ? ? ? ?
Labor ? ? ? ?
Variable Overhead ? ? ? ?
Total variable cost ? ? ? ?
Contribution margin ? ? ? ?
Less; fixed costs ? ? ? ?
Operating profit or loss ? ? ? ?
b. Do you agree with the decision to accept the special order. Yes or no?
c. Considering only profit, determine the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available Quanitity of Themostats #___? units

Andreasen Corporation

Special Order by Simpson Company:

a.                                Status quo        Alternative        

                              100,000 units   107,500 units      Total        Difference

                                ($'000)            ($'000)           ($'000)        ($'000)

Sales Revenue      $10,000              $450           $10,450      $450 Higher

Total Variable cost   5,400                420               5,820        420 Higher

Contribution           $4,600                $30             $4,630          30 Higher

Fixed costs                1,800                  20                1,820          20 Higher

Operating profit     $2,800                $10              $2,810           10 Higher

b. No.

d. Contribution per unit = $4 ($30,000/7,500)

Fixed cost = $20,000

Fixed cost Plus Profit = $30,000

Minimum quantity to make it profitable = $30,000/$4 = 7,500 thermostats

However, this profit level is far below the normal production profit of 28% on sales revenue.

Explanation:

a) Data and Calculations:

Materials $ 36.00

Labor 14.00

Variable overhead 4.00

Total variable cost = $54

Fixed overhead ($1,800,000 per year; 100,000 units per year) 18.00

Total $ 72.00

Selling price = $100

Special order = 7,500 thermostats

Price of special order = $60

Relevant costs of special order:

Materials               $ 36.00

Labor                         14.00

Variable overhead     4.00

Additional material = $2

Unit variable cost = $56

Total variable cost =   $420,000

Packaging equipment    20,000

Total relevant cost =  $440,000

Sales Revenue =       $450,000

Profit from special order = $10,000

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explanation:

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