Seasons Manufacturing Manufactures A Product With A Unit Var

seasons Manufacturing Manufactures A Product With A Unit Variable Co

Seasons Manufacturing produces a product with a unit variable cost of $100 and a selling price of $176 per unit. When producing and selling 10,000 units, the fixed manufacturing costs amount to $480,000. The company has an opportunity to sell an additional 1,000 units at a price of $140 each in a foreign market, which would not affect existing sales. If the company can produce these additional units without capacity constraints, the decision to accept this special order will impact net income. The possible impact involves an increase of $140,000, a decrease of $8,000, an increase of $8,000, or an increase of $40,000 in net income.

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Decision-making regarding special orders is a critical aspect of managerial accounting, particularly when evaluating the potential impact on net income. The scenario at Seasons Manufacturing provides an opportunity to analyze the financial implications of accepting a one-time special order in a foreign market. The key considerations include the incremental revenues and costs associated with the order, capacity constraints, and the potential effect on overall profitability.

In assessing whether to accept the special order, the primary focus should be on the contribution margin per unit and how it compares to the price offered. The unit variable cost is $100, and the order offers a price of $140 per unit. The contribution margin per unit for the order is therefore $40 ($140 - $100). Given the company’s fixed costs of $480,000 for 10,000 units, the fixed costs are fixed and do not change with the order, assuming sufficient capacity exists. Since demand exceeds current sales, and capacity is available, the fixed costs are not affected by the additional units.

The additional revenue from the order would be 1,000 units × $140 = $140,000. The additional variable costs associated with these units would be 1,000 units × $100 = $100,000. Therefore, the incremental profit from accepting this order would be the additional revenue minus variable costs: $140,000 - $100,000 = $40,000. This calculation indicates that accepting the special order would increase net income by $40,000, as fixed costs remain unchanged and the order contributes positively to the company's profits.

It is important to note that this analysis assumes there are no additional fixed costs incurred to accommodate the order and that production capacity is sufficient. Should there be capacity limitations or additional fixed costs, the conclusion might change. Nevertheless, based on the available data, the acceptance of this special order is financially advantageous and would improve the company's net income by $40,000.

Moving to the second scenario, Carter, Inc., faces a decision to make or buy a necessary component. The costs for manufacturing in-house include direct materials costing $120,000, direct labor at $20,000, variable overhead of $60,000, and fixed overhead of $40,000. The external purchase price is $220,000, with only $10,000 of fixed costs being avoidable if the company opts to buy the component.

The relevant costs for this decision are the costs that would be avoided or incurred regardless of the choice. If Carter purchases externally, avoidable costs total $10,000 (the fixed costs that can be eliminated). The total in-house cost would be the sum of direct materials ($120,000), direct labor ($20,000), and variable overhead ($60,000), totaling $200,000. The fixed overhead of $40,000 is largely unavoidable except for $10,000 in avoidable fixed costs.

The comparison involves evaluating the cost to produce internally versus purchasing externally. The internal manufacturing cost, adjusted for the avoidable fixed costs, is $200,000 - $10,000 = $190,000. Since the external purchase price is $220,000, and only a $10,000 fixed cost can be avoided, the net cost of buying is $220,000. Comparing this with the adjusted in-house cost, $190,000, the company would save $30,000 by producing internally.

Therefore, the correct decision aligns with "Make and save $30,000," as producing the component internally would be more cost-effective by this margin. This analysis highlights the importance of focusing on avoidable costs and the marginal cost of production versus external procurement prices.

The third scenario involves determining whether to sell Product A now or process it further. The current production yields 15,000 pounds of Product A, which can be sold immediately at $16 per pound, resulting in total revenue of $240,000. An alternative is to process the product further at an additional cost of $200,000, after which it can be sold at $28 per pound, resulting in total revenue of 15,000 pounds × $28 = $420,000.

The decision hinges on whether the additional processing cost leads to extra profitability. Processing further costs $200,000 and increases the selling price to $28 per pound, while selling immediately yields $16 per pound. The additional profit from processing is calculated by comparing the net revenues after the extra cost.

The revenue from selling now is $240,000, with no further costs beyond production. If processed further, the total revenue is $420,000, but the additional processing cost is $200,000, leaving net revenue of $220,000 ($420,000 - $200,000). Comparing this to the immediate sale revenue of $240,000 shows a decrease of $20,000 ($240,000 - $220,000).

Thus, it is more profitable to sell Product A now rather than process it further, with the company being better off by $20,000 if it chooses to sell immediately. This decision emphasizes the importance of analyzing incremental costs and revenues to maximize profit and avoid unnecessary processing costs that do not add enough value to justify the expense.

In conclusion, these scenarios demonstrate fundamental principles of managerial decision-making. The analysis involves evaluating contribution margins, relevant costs and revenues, avoidable fixed costs, and incremental impacts on net income. Proper application of these principles ensures that firms make financially sound decisions that enhance profitability and strategic positioning.

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