20versus88000 3 in evaluat ing whether air frisco

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Unformatted text preview: nco me by $90,000. Since no variable selling costs will be incurred on this order, this cost is irrelevant. Similarly, fixed costs are irrelevant because they will be incurred regardless of the decisio n. 2a. Revenues fro m special order ($25 ´ 10,000 bats) Variable manufacturing costs ($16 ´ 10,000 bats) 1 Contribut ion margin foregone ([$32─$18 ] ´ 10,000 bats) Decrease in operating inco me if Ripkin order accepted 1 $250,000 (160,000) (140,000) $ (50,000) Direct matls. + Direct manuf. labor + Variable manuf. overhead + Variable selling exp. = $12 + $1 + $3 + $2 = $18 Based strict ly on financial considerations, Louisville should reject Ripkin’s special order because it results in a $50,000 reduction in operating inco me. 2b. Louisville will be indifferent between the special order and continuing to sell to regular customers if the special order price is $30. At this price, Louisville recoups the variable manufacturing costs of $160,000 and the contribut ion margin given up fro m regular customers of $140,000 ([$160,000 + $140,000] ÷ 10,000 units = $30). Looked at a different way, Louisville expects the full price of $32 less the $2 saved on variable selling costs. 2c. Louisville may be willing to accept a loss on this special order if the possibilit y of future lo ng­term sales seem likely. However, Louisville shouldalso consider the effect on customer relat ionships by refusing sales fro m exist ing customers. Also, Louisville cannot afford to adopt the special order price long­term or with other customers who may ask for price concessio ns. 11­18 11­30 (30 min.) Contribution approach, relevant costs. 1. Average one­way fare per passenger Commissio n at 8% of $500 Net cash to Air Frisco per ticket Average number of passengers per flight Revenues per flight ($460 × 200) Food and beverage cost per flight ($20 × 200) Total contribution margin fro m passengers per flight $ $ × $ $ $ 500 (40) 460 200 92,000 4,000 88,000 480.00 (38.40) 441.60 20.00 421.6...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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