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ACT 5060 � Accounting for Decision Makers

Exploration of accounting principles for effective decision-making.

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    ACT 5 060 – Accounting for Decision Makers HW #4 Directions: Answer all five questions. Please submit your work in Word or PDF formats only. You can submit an Excel file to support calculations, but please “cut and paste” your solu tions into the Word or PDF file . Be sure to show how you did your calculations. Also, please be sure to include your name at the top of the first page of your file. You can use any sources you wish, except for other people. Please be sure to document any source you use. The assignment is due by 9:00 AM on Wednesday, November 19 th . Please run spell check and proofread your answers . If you have any questions, Question #1 Consider the following information , prepared based on a monthly capacity of 80,000 units : Category Cost per Unit Variable manufacturing costs $ 18 F ixed manufacturing costs $5 Variable selling costs $ 4 Fi xed selling costs $ 3 Capacity cannot be added in the month and the firm currently sells the product for $33 per unit. Consider each of these scenarios independent of each other. a) The company is currently producing 72,000 units per month. A potential customer has contacted the firm and offered to purchase 8,000 units this month only. The customer is willing to pay $28 per unit. Since the potential customer approached the firm, there will be no variable selling costs incurred. Should the company accept the special order? Why or why not? Be specific. Current Cont pu = SP pu – VC pu = 33 – (18+4) = $11 pu So Total COnt for 72,000 units = 72,000*11 = $792,000 Fixed cost is Capacity based. SO Fixed Mfg + Selling cost = 80,000*($5+3) = $640,000 So Net Income = Total Cont – Total FC = 792,000 - 640,000 = $152,000 Addl Contriobution pu from Spl order = SP pu – VC pu = 28 – 18 = $10 pu. So Addl contribution will be 8000*$10 = $80,000 So Spl order will give addl Net income of $80,000 without affecting existing operations. So it should be accepted to fully utilize the capacity. Fixed costs will not be affected as they are period costs & will be incurred irrespective of Spl order. Hence FC are not relevant to Spl order decsion making. b) Assume the same facts as in part a, except that the company is producing 80,000 units per month. Should the company accept the special order? Why or why not? Be specific.

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