Question

Exercise 11-22 Special Order; Opportunity Cost [LO 11-2) Grant Industries, a manufacturer of electronic parts, has recently received an Invitation to bid on a special order for 15,000 units of one of its most popular products. Grant currently manufactures 30,000 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 bid at $8 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. 30,000 45.ee Units Manufacturing costs: Direct materials Direct labor Factory overhead Total manufacturing costs Unit cost $ 75, 195,000 120,000 $ 300,000 $112,500 157.500 135,000 $405,000 $ 10 $ 9 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 5,100 units to its regular customers? Assume the preceding facts plus a normal selling price of $18 per unit. Complete this question by entering your answers in the tabs below. Required 2 Required 4 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? Relevant cost per unit Bid price per unit should be any price above Change in short-term operating income < Required 2 Required 4 >

Answer 1

Answer 2

			Differential Cost
Units	30000	45000	15000
Mfg. Cost:
Direct Material	75000	112500	37500
Direct Labour	105000	157500	52500
Factory Overhead	120000	135000	15000
			105000
Per unit cost			7.00

Thus relevant cost for producing additional 15000 units is $ 7 per unit.Minimum short term bid price can be anything above $7 per unit.

If the order is accepted at the price recommended by the sales manager i.e $8 per unit, operating Income will increase by $15,000($1*15000 units)

Answer 4

Sales Price	18
per unit cost	10
Gain per Unit	8
Sales Lost (Units)	5100
Opportunity Cost	40800

Part II

Answer 1

Increase in contribution margin of T1	14,400
Loss of Contribution Mardin of T2	(88,000)
Reduction in Operating Income of Barbour Corporation	(73,600)

Answer 2

Contribution Margin of T1 should increase by atleast 88,000 to make up financial loss from dropping T2

Current Contribution Margin of T1	144000
Addition in Contribution Margin	88000
Revised CM required	232000
Increase in CM (%)	61.11%
Thus sales of T1 should increase 61.11%

Answer 3

Loss of Contribution Mardin of T2	(88,000)
Saving in Fixed Cost	51500
Revised financial loss of dropping T2	(36,500)

Current Contribution Margin of T1	144000
Addition in Contribution Margin	36500
Revised CM required	180500
Increase in CM (%)	25.35%
Thus sales of T1 should increase 25.35%