Reference no: EM132909759

Question - Flossy makes two types of table napkins, Square and Rectangular. Square sells for $1.30 while Rectangular sells for $1.00 each box. The two products are highly similar.

Making table napkins is highly automated. Labour costs are only 10¢ a box. Material costs are also similar. Squares use 26¢ of material while Rectangular use 22¢ each. Indirect production costs are quite high at $3,500,000 per year. Fixed costs are $1,500,000 per year. The company allocates fixed costs to each product line based on dollar sales.

Flossy plans to make 3,000,000 Squares and 6,000,000 Rectangulars.

Required -

a) Create a contribution margin income statement based on planned production.

b) Sherry Softy is concerned about the Rectangular line. She feels she can save $300,000 in fixed costs if they drop the line. Should they drop Rectangles?

c) A large national retailer has asked Softies to create a line of Round tissues. The retailer is willing to pay $1.50 per Round. Costs will be similar to the cost of Squares except that the special round box will add 8¢ to the cost of materials. The retailer will order 200,000 Rounds. To complete this order, Softies will have to invest in a special round die which will cost them $100,000. Calculate whether Softies should accept the special order based on profits.

d) Are there any non-financial reasons why Softies should or should not accept the order?