Question 1 - Doug Dugan owns and operates Doug's Dog Houses, a successful small business that produces and sells dog houses to customers across the Great Plains region of North America. Each dog house sells for $200. The unit variable costs to produce each standard dog house are $80, and the annual fixed costs for the operation total $18,000.
Part A. How many dog houses must Doug's business sell each year in order to break even?
Part B. How much in terms of annual sales revenue (dollars) must Doug's business sell in order to break even?
Question 2 - Referring back to Question 1 above, Doug's Dog Houses just received a special order from Kenny's Kennels for 1,000 specially insulated and carpeted dog houses offered at a selling price of $250 each. Doug, the owner of Doug's Dog Houses, believes that along with his normal business volume for standard dog houses he can probably fill this special order through a bulk purchase of some additional building materials and by hiring some temporary part-time labor in the production area. In other words, with some added variable costs, Doug is sure he has enough capacity in his operation to accept the special order without impacting his regular business volume. To help him ultimately decide whether or not to accept the special order of premium insulated dog houses requested by Kenny's Kennels, Doug listed the following detailed breakdown of the unit costs associated with this product: direct materials, $40; direct labor, $50; variable manufacturing overhead, $20; fixed manufacturing overhead, $10.
Part A. List the relevant costs per unit for Doug's decision as to whether or not to accept the special order. (Hint: be careful...just because a value is listed does not necessarily mean it's relevant to this decision.)
Part B. What would be the change in net income if Doug decides to accept the special order from Kenny's Kennels?
Part C. Considering the analysis above, should Doug's Dog Houses accept the special order from Kenny's Kennels? Why or why not?