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Lewis Company Product C impact on profits

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Lewis Company (accounting information on attachment) receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,100 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $180 per unit, direct materials costs will decrease by $15 per unit and Lewis does not have to incur any variable selling and administrative expenses.

Selling price per unit $300
Variable costs per unit
  Direct material $120
  Direct labor $60
  Variable overhead $40
  Variable selling and administrative $10

Fixed costs
  Fixed manufacturing overhead $250,000
  Fixed selling and administrative $100,000

Lewis Company
Absorption Income Statement
For the period ending Dec. 31, 2012

Sales $2,400,000
Cost of goods sold $1,960,000
  Gross profit (margin) $440,000
Selling and administrative expenses $180,000
  Net income $260,000


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 Lewis?
What if the company only pays $160 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?

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Solution Preview

Your tutorial is in Excel, attached. I give you a reason for ignoring ...

Solution Summary

Your tutorial is in Excel, attached. I give you a reason for ignoring some costs as not relevant and show you the relevant costs. I compute the contribution margin per unit under both price levels. Then, I give you the best decision and seven other considerations that might impact your decision.