Fairmount Travel Gear produces backpacks and sells them tovendors who sell them under their...

Free

70.2K

Verified Solution

Question

Accounting

Fairmount Travel Gear produces backpacks and sells them tovendors who sell them under their own label. The cost of one of itsbackpacks follows:
Materials $ 18.30
Labor 12.30
Variable overhead 5.30
Fixed overhead ($2,853,900 per year; 453,000 units per year)6.30
Total $ 42.20
Riverside Discount Mart, a chain of low-price stores, has askedFairmount to supply it with 22,000 backpacks for a specialpromotion Riverside is planning. Riverside has offered to payFairmount a unit price of $45 per pack. The regular selling priceis $63. The special order would require some modification to thebasic model. These modifications would add $4.30 per unit inmaterial cost, $1.80 per unit in labor cost, and $0.80 in variableoverhead cost. Although Fairmount has the capacity to produce the22,000 units without affecting its regular production of 453,000units, a one-time rental of special testing equipment to meetRiverside’s requirements would be needed. The equipment rentalwould be $70,400 and would allow Fairmount to test up to 53,000units.
Required:
a. Prepare a schedule to show the impact of filling theRiverside order on Fairmont’s profits for the year.
b. Do you agree with the decision to accept thespecial order?
Yes
No
c. Considering only profit, determine theminimum quantity of backpacks in the special order that would makeit profitable.

Answer & Explanation Solved by verified expert

3.6 Ratings (558 Votes)

(a).

	(All Costs in Thousands of Dollars)
	Status Quo 453000 units	Alternative 475000 units	Difference
Sales revenue	$28539	$29529	$990	Higher
Less: Variable costs;				Higher
Materials	$8289.9	$8787.1	$497.2	Higher
Labor	$5571.9	$5882.1	$310.2	Higher
Variable overhead	$2400.9	$2535.1	$134.2	Higher
Total variable cost	$16262.7	$17204.3	$941.6	Higher
Contribution margin	$12276.3	$12324.7	$48.4	Higher
Less: Fixed costs	$2853.9	$2924.3	$70.4	Higher
Operating profit (Loss)	$9422.4	$9400.4	($22)	Lower

(b).

Answer is (NO)

Explanation;

As we have seen in part (a) that after accepting special order total operating profit have been declined, so we will not accept this speecial order.

(c). 32000 units

Explanation;

Let’s calculate break-even point for knowing the minimum quantity of backpacks in the special order that would make it profitable;

Incremental fixed costs = $70400

Incremental contribution margin per unit ($48400 / 22000) = $2.2

Break-even point will be;

$70400 / $2.2 = 32000 units

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

In: AccountingFairmount Travel Gear produces backpacks and sells them tovendors who sell them under their own...Fairmount Travel Gear produces backpacks and sells them tovendors who sell them under their own label. The cost of one of itsbackpacks follows:Materials $ 18.30Labor 12.30Variable overhead 5.30Fixed overhead ($2,853,900 per year; 453,000 units per year)6.30Total $ 42.20Riverside Discount Mart, a chain of low-price stores, has askedFairmount to supply it with 22,000 backpacks for a specialpromotion Riverside is planning. Riverside has offered to payFairmount a unit price of $45 per pack. The regular selling priceis $63. The special order would require some modification to thebasic model. These modifications would add $4.30 per unit inmaterial cost, $1.80 per unit in labor cost, and $0.80 in variableoverhead cost. Although Fairmount has the capacity to produce the22,000 units without affecting its regular production of 453,000units, a one-time rental of special testing equipment to meetRiverside’s requirements would be needed. The equipment rentalwould be $70,400 and would allow Fairmount to test up to 53,000units.Required:a. Prepare a schedule to show the impact of filling theRiverside order on Fairmont’s profits for the year.b. Do you agree with the decision to accept thespecial order?YesNoc. Considering only profit, determine theminimum quantity of backpacks in the special order that would makeit profitable.