Reminder: The information is the same as in the previous question

Furniture Co. sells chairs. A partial income statement for a typical month is given below.

                                                                                    £                      £

                        Sales (10,000 chairs)                                                  100,000

                        Costs:

                        Direct Materials                               20,000

                        Direct Labor                                   16,000

                        Overhead (50% variable)                 20,000             56,000

                        Gross Profit                                                                44,000

A local school has offered to buy 500 chairs. Although the normal selling price is £10 per chair, the school has offered £8 each, citing the large volume of the order as the reason for cutting the price. There is no change in fixed costs.

The fixed overhead is/will _____.

Question

Reminder: The  information is the same as in the previous question

Furniture Co. sells chairs. A partial income statement for a typical month is given below.

£                      £

Sales (10,000 chairs)                                                  100,000

Costs:

Direct Materials                               20,000

Direct Labor                                   16,000

Overhead (50% variable)                 20,000             56,000

Gross Profit                                                                44,000

A local school has offered to buy 500 chairs. Although the normal selling price is £10 per chair, the school has offered £8 each, citing the large volume of the order as the reason for cutting the price. There is no change in fixed costs.

The fixed overhead is/will _____.

BlackTom AI · Accepted Answer

We start by restating the scenario: A school offers to buy 500 chairs at £8 each. The company has fixed costs that do not change with the order size, only variable costs and revenue change.
Option 1: 'irrelevant in making the decision because the fixed costs per unit are unaffected' This is partly true but not precise. The fixed costs per unit being unchanged is a property, but the key decision factor is whether fixed costs influence the incremental (marginal) analysis. Since fixed costs do not change with the order, they are not relevant to the incremental profit from accepting the order; however, saying fixed costs per unit are unaffected is a different framing and can be seen as a less precise statement about relevance. The more accurate and commonly accepted reasoning is that total fixed costs are unaffected by accepting the order, making fixed costs irrelevant to the decision.
Option 2: 'irrelevant in making the decision because the total fixed costs are unaffected' This correctly identifies that the incremental decision for the 500 chairs hinges on variable costs and incremental revenue; fixed costs remain constant in total, so they do not affect the incremental profitability of the special order.
Option 3: 'will increase to above £1 per chair if the order is accepted' This is not aligned with the given data. The information provided does not suggest that fixed overhead will rise per chair; overhead is described as 50% variable, and fixed costs are stated as fixed. The per-chair fixed cost would not rise simply due to accepting the order.
Option 4: 'will increase to above £1 per chair if the order is not accepted' This statement is inconsistent with the usual interpretation of fixed costs: whether the order is accepted or not does not cause the fixed overhead to increase in this scenario; fixed costs remain the same in total, regardless of accepting the order. The phrasing implies a change that contradicts the problem's assumption that fixed costs do not change.
In summary, the central idea is that fixed costs do not vary with the decision to accept a special order, so they are not part of the incremental analysis. The correct reasoning aligns with the notion that total fixed costs are unaffected and thus irrelevant for this decision, while the other options either misstate the behavior of fixed costs or mischaracterize the relevance of the fixed cost information.

LC Decision Making & Control 32181 Week 8 Quiz: Pricing and Strategies

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