Special Order Andreasen Corporation manufactures thermostats...

Special Order Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit: (TABLE CANT COPY) Simpson Company has approached Andreasen with an offer to buy 7,500 thermostats at a price of $$\$ 30$$ each. The regular price is $$\$ 50$$. 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 their branding, which requires a more expensive label, resulting in an additional $$\$1$$ 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 $$\$ 10,000$$. Required a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen's profits for the year. b. Would you recommend that Andreasen accept the order? c. Considering only profit, what is the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available?

Special Order
Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit:
(TABLE CANT COPY)
Simpson Company has approached Andreasen with an offer to buy 7,500 thermostats at a price of $$\$ 30$$ each. The regular price is $$\$ 50$$. 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 their branding, which requires a more expensive label, resulting in an additional $$\$1$$ 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 $$\$ 10,000$$.

Required
a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen's profits for the year.
b. Would you recommend that Andreasen accept the order?
c. Considering only profit, what is the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available?

Key Concepts

Capacity Considerations

Capacity considerations involve evaluating whether the company has sufficient production capacity to accept a special order without disrupting normal operations. If excess capacity exists, the fixed costs are generally not impacted, and decisions can be made based solely on the incremental costs and revenues associated with the special order.

Contribution Margin Analysis

Contribution margin analysis measures the amount each unit contributes towards covering fixed costs and generating profit after variable costs have been deducted. In special order scenarios, it helps determine whether the incremental revenue per unit exceeds the incremental variable costs and any additional one-time costs, ensuring each additional unit contributes positively to overall profit.

Special Order Pricing

Special order pricing involves determining an appropriate price for an order that falls outside the normal range of production. It requires careful consideration of the incremental costs incurred and the additional revenue generated by the order, ensuring that accepting the special order does not adversely affect the company's standard pricing strategy or market positioning.

Incremental Cost Analysis

Incremental cost analysis, also known as differential cost analysis, is the process of comparing the additional revenues and additional costs that result from a decision. In the context of a special order, it focuses on those costs that will change as a result of accepting the order, such as extra material expense and any one-time costs, while excluding costs that remain unchanged regardless of the decision.

Fixed vs. Variable Costs

Understanding the distinction between fixed and variable costs is crucial when evaluating special orders. Variable costs change directly with the level of production, such as materials and direct labor, whereas fixed costs remain constant regardless of the number of units produced. Special order decisions typically consider only the variable or incremental costs if fixed capacity is available and the fixed costs will not be affected.

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