Herrestad Company Special order for product C
Not what you're looking for?
Differential analysis involves knowing which costs are relevant, i.e. future costs that vary among alternatives. It is important to know what information to use and not just how to execute the analysis.
Herrestad Company receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,000 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $150 per unit, direct materials costs will decrease by $12 per unit and Herrestad does not have to incur any variable selling and administrative expenses.
Make a list of the expenses and amounts that are relevant for this decision. How much with the sale of this product contribute to the profitability of Herrestad?
What if the company only pays $140 per unit? How does this change the contribution towards profitability?
If you were the manager, would you accept this order? What considerations, other than financial would enter into your decision?
--
Current Costs of Product B: (see attached for better formatting of tables)
Product B
Sales $ 300.00
Variable costs:
direct material $ 120.00
direct labor $ 60.00
variable overhead $ 40.00
variable selling and admin $ 10.00
contribution margin $ 70.00
Purchase this Solution
Solution Summary
Your tutorial is 663 words plus a table and three references.
Solution Preview
Relevant Costs
Current Costs of Product B: (see attached for better formatting of tables)
Product B
Sales $ 300.00
Variable costs:
direct material $ 120.00
direct labor $ 60.00
variable overhead $ 40.00
variable selling and admin $ 10.00
contribution margin $ 70.00
Relevant costs are those that change with the decision. In this case, the decision is whether to accept the special order or not. So, the relevant costs are those that will be different if the order occurs versus if the order does not occur. If the order occurs, we get the sales price, so that is relevant. If the order is accepted, we have to incur materials, labor, and variable overhead to complete the items for the customer but not selling and administrative costs (told this in fact pattern). So, these three are also relevant. No fixed costs are changing so they are not relevant. So, the relevant costs per unit, after adjusting for the difference in materials compared to product B is:
Product C
Sales $ 150.00
Variable costs:
direct material $ 108.00
direct labor ...
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
Recent Feedback
- "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
- "Thank, this is more clear to me now."
- "Awesome job! "
- "ty"
- "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.