Beta Corporation currently sells 15,000 units at $40 each with variable costs of $24 per unit and fixed costs of $180,000. The company has excess capacity and receives a special order for 3,000 units at $28 per unit. Accepting this order would require hiring temporary staff, adding $6,000 in fixed costs. Additionally, regular sales would decrease by 5% due to market perception issues. Should the company accept the order, and what is the net financial impact? Answer: Reject the order; net negative impact of $6,000 since lost regular sales outweigh special order benefits
Special order contribution: 3,000 × ($28 - $24) = $12,000. Less additional fixed costs: $12,000 - $6,000 = $6,000 net from special order. Lost regular sales: 15,000 × 5% = 750 units. Lost contribution margin: 750 × ($40 - $24) = $12,000. Net impact: $6,000 - $12,000 = -$6,000. The order should be rejected as it results in a net negative impact of $6,000.
Theta Corp's monthly operating results show sales of $800,000, variable costs of $480,000, and fixed costs of $250,000. The company is considering three mutually exclusive proposals: (1) Increase advertising by $30,000 to boost sales by 12%, (2) Automate production to reduce variable costs by 8% but increase fixed costs by $45,000, or (3) Outsource a component to reduce both variable costs by $25,000 and fixed costs by $15,000 monthly, but limit sales growth to 8% due to supplier constraints. Which proposal maximizes operating income, and by how much compared to the current situation? Answer: Proposal 3 maximizes income, increasing it by $65,600 over the current situation through cost optimization
Current operating income: $800,000 - $480,000 - $250,000 = $70,000. Proposal 1: Sales = $896,000, variable costs = $537,600 (maintaining 60% ratio), fixed costs = $280,000. Income = $896,000 - $537,600 - $280,000 = $78,400. Increase = $8,400. Proposal 2: Sales = $800,000, variable costs = $441,600 (8% reduction), fixed costs = $295,000. Income = $800,000 - $441,600 - $295,000 = $63,400. This decreases income by $6,600. Proposal 3: Sales = $864,000 (8% increase), variable costs = $518,400 (60% of new sales) - $25,000 = $493,400, fixed costs = $235,000. Income = $864,000 - $493,400 - $235,000 = $135,600. Increase = $65,600. Proposal 3 maximizes income.
