Question

Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bld on a special order for 20,000 units of one of its most popular products. Grant currently manufactures 40,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50% capacity. There will be no marketing costs on the special order. The sales manager of Grant wants to set the bld at $9 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. on the special order at that price 40,000 60,000 Units Manufacturing contar Direct materials Direct labor Factory overhead Total manufacturing Unit cost $ 80,000 120,000 $120,000 180,000 120.000 $130,000 $420000 300,000 $440,000 $600,000 king cost. 11 S 10 Required 2. What is the relevant cost per unit? What do you think the minimum short-term bid price per unit should be? What would be the impact on short-term operating Income if the order is accepted at the price recommended by the sales manager? 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. IN Complete this question by entering your answers in the tabs below. ne tabs below.

Answer 1

Answer with working notes is given below

$8.00 Relevant cost per unit Bid price per unit should be any price above Change in short-term Operating Income $8.00 $20,000 $2.00 Relevant cost per unit Direct Material Direct Labor Variable factory overhead Relevant cost per unit $3.00 $3.00 As per working below $8.00 Bid price should be above $8 to ensure no loss 20,000 $1.00 ($9-$8) Special order units Contribution per unit (Bid price - Relevant cost) Total increase in Operating Income $20,000 Working note: Units Factory Overhead 40,000 $240,000 Difference 60,000 20,000 $300,000 $60,000 Variable overhead per unit Difference in Factory Overhead Difference in Units $60,000 20,000 $3.00 Per unit Units Variable Factory overhead Fixed Factory overhead Total factory overhead 40,000 $120,000 $120,000 $240,000 60,000 $180,000 (Units X $3 per unit) $120,000 (Total Factory overhead - Variable factory overhead) $300,000 4 Total Opportunity Cost $60,000 Selling price Less: Variable Cost Contribution Sales units lost to regular customers Total Contribution lost $20 $8 As calculated above $12 A 5,000 B $60,000 A*B