Travel Simplify Pte Ltd receives an offer from a new overseas customer to purchase 3,500 units of the smart pet device at $158 per unit to be sold in Hong Kong. Travel Simplify needs to replace the existing camera lens with a special lens to meet the customer’s requirement for camera with night vision. This will increase its direct material costs by $12 per unit. In addition, Travel Simplify will incur a one-time production setup cost of $20,000 and freight charges of $3,500. Variable selling expenses will reduce by $5 per unit as no sales commission will be incurred.

There will be no change in other costs and the company has the capacity to produce the additional units ordered.i)	Prepare a differential analysis report (showing detailed description and breakdown of relevant items) to determine whether this special order should be accepted.

ii)	What is the minimum price per unit that the overseas customer has to offer to Travel Simplify before it will accept the special order? (Round your answer to 2 decimal places.)

Let's break down and analyze the situation to address the questions.

### i) Differential Analysis Report

This report will compare the relevant costs and revenues associated with accepting the special order versus not accepting it.

#### **Revenue:**
- **Revenue from the special order:** 
  \[
  3,500 \text{ units} \times 158 \text{ USD/unit} = 553,000 \text{ USD}
  \]

#### **Costs:**
- **Incremental direct material costs:** 
  \[
  3,500 \text{ units} \times 12 \text{ USD/unit} = 42,000 \text{ USD}
  \]
  
- **One-time production setup cost:** 
  \[
  20,000 \text{ USD}
  \]

- **Freight charges:** 
  \[
  3,500 \text{ USD}
  \]

- **Variable selling expenses reduction:** 
  \[
  3,500 \text{ units} \times 5 \text{ USD/unit} = 17,500 \text{ USD} \text{ (Cost saving)}
  \]

#### **Total Incremental Costs:**
\[
\text{Incremental Costs} = 42,000 \text{ USD} + 20,000 \text{ USD} + 3,500 \text{ USD} - 17,500 \text{ USD} = 48,000 \text{ USD}
\]

#### **Net Incremental Profit:**
\[
\text{Net Incremental Profit} = \text{Revenue} - \text{Incremental Costs}
\]
\[
\text{Net Incremental Profit} = 553,000 \text{ USD} - 48,000 \text{ USD} = 505,000 \text{ USD}
\]

### **Conclusion:**
The net incremental profit is \$505,000 if the order is accepted. This positive profit indicates that Travel Simplify should accept the special order.

### ii) Minimum Price Per Unit

To calculate the minimum price per unit that the overseas customer should offer to avoid any loss, we need to cover all the incremental costs.

\[
\text{Minimum Price per Unit} = \frac{\text{Total Incremental Costs}}{\text{Number of Units}}
\]
\[
\text{Minimum Price per Unit} = \frac{48,000 \text{ USD}}{3,500 \text{ units}} \approx 13.71 \text{ USD/unit}
\]

However, this is the incremental cost per unit; the total cost per unit would include the base cost of producing the device. Assuming the base cost is fully absorbed within the \$158 price, the minimum price that needs to be covered by the customer should be:

\[
\text{Minimum Price per Unit} = 13.71 \text{ USD/unit} + \text{(Base cost per unit already covered by the \$158 price)}
\]

This means the customer must offer a price **at least equal to the base cost per unit** plus \$13.71 for the special requirements to ensure that the company does not incur a loss. Since the offered price is \$158, and only an additional \$13.71 is needed, **the price per unit can stay the same at \$158 and still cover all costs.**

### Final Answer:
**Minimum Price per Unit:** \$13.71 (incremental cost per unit) + Base Cost per Unit. But the price of \$158 offered already covers this, so the customer doesn't need to increase the price.

---

Would you like more details on any part of the calculations or the analysis?

### Follow-Up Questions:

1. What are the fixed costs not included in the analysis, and how do they affect the decision?
2. How would the decision change if the variable costs per unit were different?
3. What would happen if the freight charges increased?
4. What is the impact of reducing the sales commission on the overall profit?
5. How would the decision change if the production setup cost were higher?
6. What would happen if the customer requested more units at the same price?
7. How would different pricing strategies affect the minimum price per unit?
8. What is the break-even point for the number of units that need to be sold at the minimum price?

**Tip:** Always consider both incremental costs and revenue when evaluating special orders, as fixed costs may not change.

Understand whether Travel Simplify Pte Ltd should accept a special order for smart pet devices. Detailed differential analysis comparing revenues and incremental costs including direct material costs, production setup costs, and freight charges. Learn the minimum price per unit required for profitability.

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