Made Easy, Inc., manufactures household products such as windows, light fixtures, ladders, and work tables. During the year it produced 10,000 Model 10X windows but sold only 5,000 units at $40 each. The remaining units cannot be sold through normal channels. Cost for inventory purpose on December 31 included the following data on the unsold units
Materials $10.00
Labor 5.00
Variable overhead 3.00
Fixed overhead 2.00
Total cost per window $20.00
Made Easy can sell 5,000 windows at a liquidation price of $20.00 per window, but it will incur a packaging and shipping charge of $6.00 per window.
Required:
1. Identify the relevant costs and revenues for the liquidation sale alternative. Is Made Easy better off accepting the liquidation price rather than doing nothing?
Solution (1)
The relevant cost in this case are the ones that will change if the special order is accepted. These include the variable costs, which are:
Materials
Labor
Variable overhead
The additional costs that will be incurred per unit if the special order is accepted are as follows:
Materials $10.00
Labor $5.00
Variable overhead $3.00
Total per unit relevant cost $18.00
2. Assume the Model 10X can be reprocessed to another size window, Model 20X, which will require the same amount of labor and overhead as was initially required to produce the Model 10X but sells only $30. Determine the most profitable course of action: liquidate or reprocess.
Solution (2)
To determine the differential profit to the company if the order is accepted, the differential revenue from the order must be compared to the differential costs that will be incurred if the order is accepted. The differential revenue is computed as follows:
5,000 units * $40/unit = $200,000
The differential costs consist of the $18.00 of variable costs per unit that will only incurred if the order is accepted:
5,000 units * $18.00/unit = $90,000
To compute the differential income, the differential revenue must be compared to the differential costs:
Differential revenue $200,000
Differential costs $90,000
Differential income $110,000
Nonfinancial factors to be considered include weather:
a. the excess capacity is sufficient to produce the 5,000 units without taking away from the manufacture of units that can be sold at full price;
b. this selling price will become known to regular customers who then will demand a similar price;
c. this will be a one-time order or if this customer will be a source of future business, this demanding the same price breaks on follow-up orders.
Help is appreciated Thanks!
Looks alright to me, only problem is:
"…considered include *weather*:
a. the excess capacity is sufficient to produce the 5,000…"
Should be "whether".
