Reference no: EM132562287

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

                                                      Custom Dresses                 Standard Dresses                           Total

Number of dresses                       10                                              20                                   30

Sales revenue                               $51,000                                     $31,000                        $82,000

Materials                                        $10,200                                       $8,200                        $18,400

Labor                                              20,200                                         9,200                         29,400

Machine depreciation                             620                                          320                             940

Rent                                                4,400                                      3,000                                  7,400

Heat and light                                    1,200                                         800                                      2,000

Other production costs 3,000

Marketing and administration 7,900

Total costs $69,040

Operating profit $12,960

• Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 940 hours, of which 620 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,400 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied.
• A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $25,000 for the special order. Materials and labor for the order will cost $6,200 and $10,200, respectively. The special order would require 148 hours of machine time. Ms. Nili's company would save 160 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Required:

Question 1: Calculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.)

Question 2: From an operating profit (loss) perspective for March, should Ms. Nili accept the order?

Yes/No

Question 3: What is the minimum price Ms. Nili should accept to take the special order?