Problem - Resource Usage Model, Special Order
Ehrling, Inc., manufactures metal racks for hanging clothing in retail stores. Ehrling wasapproached by the CEO of Carly's Corner, a regional nonprofit food bank, with an offer to buy350 heavy-duty metal racks for storing canned goods and dry food products. While racks normallysell for $245 each, Carly's Corner offered $75 per rack. The CEO explained that the numberof families they served had grown significantly over the past two years, and that the charityneeded additional storage for the donated food items. Since Ehrling is operating at 80 percent ofcapacity, and Ehrling employees have "adopted" Carly's Corner as their annual charity, the company wants to make the special order work. Ehrling's controller looked into the cost of the storage racks using the following information from the activity-based accounting system:
Expansion of activity capacity for setups, inspection, and machining must be done in steps. Forsetups, each step provides an additional 20 hours of setup activity and costs $3,000. For inspection,activity capacity is expanded by 2,000 hours per year, and the cost is $20,000 per year (thesalary for an additional inspector). Machine capacity can be leased for a year at a rate of $40per machine hour. Machine capacity must be acquired, however, in steps of 1,500 machinehours.
Required:
1. Compute the change in income for Ehrling, Inc., if the order is accepted.
2. Does the order require any change in capacity for setups, packing, or machining?
3. Suppose that the packing activity can be eliminated for this order since the customer is in town and does not need to have the racks boxed and shipped. Because of this, direct materials can be reduced by $13 per unit, and direct labor can be reduced by 0.5 hour per unit. How is the analysis affected?