Question

-2] 11-22 Special Order: O Order: Opportunity Cost Grant Industries, a manufacturer of electronic parts, has e received an invitation to bid on a special order for 20,000 units of one of its most popular ducts. Grant currently manufactures 40,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 30% capacity. There will be no marketing costs on the special order The sales manager of Grant wants to set the bid at $9 per unit because she is sure that Grant will get the business at that price. Others on the executive committee of the firm object, saying that Grant would lose money on the special order at that price. 40,000 60,000 Units Manufacturing costs: Direct materials Direct labor Factory overhead Total manufacturing costs Unit cost $ 80,000 120,000 240,000 $440,000 $120,000 180,000 300,000 $600,000 11 10 Required 1. Why does the unit cost decline from $11 to $10 when production level rises from 40,000 to 60,000 units? 2. What would be the impact on short-term operating income if the order is accepted at the price recommended by the sales manager? What do you think the minimum (short-term) bid price should be? 3. List some additional factors Grant should consider in deciding how much to bid on this special order. 4. What would the total opportunity cost be if by accepting the special order the company lost sales of 5,000 units to its regular customers? Assume the preceding facts plus a normal selling price of $20 per unit. . .. nmodnetion capacity producing

Answer 1

1) Costs declined from $11 to $10 due to the fixed overhead costs as these are the same (in total) at each production level, thus per-unit fixed costs declined as level of production increases

2) The relevant costs are

Materials ($80,000 ÷ 40,000)	$2
Labor ($120,000 ÷ 40,000)	$3
Variable overhead ($300,000-$240,000) ÷ (60,000-40,000)	$3
Total	$8

Thus minimum bid price should be $8

The selling price as recommended by the sales manager would cause a contribution margin for the amount of $20,000

3) -- Does the order would cause a further regular business with this customer?

-- Does the order would be in the strategic best interest of the entity, in an approach will it undermine or support Grant Industry's desired market image?

-- While Grant holds appropriate capacity for the completion of the special order, will there be any additional variable manufacturing costs for the completion of the project, for example, special set-up or tooling costs, etc.

-- Availability of alternative capacity usages, which might give an even greater contribution margin

4)

Selling price per unit	$20
Variable cost per unit
Direct materials	$2
Direct labor	$3
Contribution margin per unit	$15
Lost sales (in units)	5,000
Opportunity cost	75,000