Question

The Medal Plus Company manufactures windows. Its manufacturing plant has the capacity to produce 11,000 windows each month. Current production and sales are 10,000 windows per month. The company normally charges $250 per window. Cost information for the current activity level is as​ follows:

Variable costs that vary with the number of units produced

Direct materials $400,000

Direct manufacturing labor 350,000

Variable costs (for setups, materials handling, quality control, and so on) that vary with the number of batches, 50 batches x $800 per batch 40,000

Fixed manufacturing costs 75,000

Fixed marketing costs 150,000

Total costs $1,015,000

Medal plus has just received a special​ one-time-only order for 1,000 windows at $200 per window. Accepting the special order would not affect the​ company's regular business or its fixed costs. Medal Plus makes windows for its existing customers in batch sizes of 200 windows ​(50 batches x200 windows per batch​ =10,000 ​windows). The special order requires Medal Plus to make the windows in 88 batches of 125 windows.

Requirement 2. Suppose plant capacity was only 10,500 windows instead of 11,000 windows each month. The special order must either be taken in full or be rejected completely. Should Medal Plus accept the special​ order? Show your calculations. Complete the analysis below to determine if Medal Plus should accept the special order under this scenario.

		With One-Time
		Only Special Order
		Under Reduced
		Plant Capacity
		10,500 Windows
Revenues
Variable costs:
	Direct materials
	Direct manufacturing labour
	Batch manufacturing costs
Fixed costs:
	Fixed manufacturing costs
	Fixed marketing costs
Total costs
Operating income

Answer 1

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The Medal Plus Company
Variable cost per unit	Per Unit	Amount $
Units	10,000.00
Materials	400,000.00	40.00	This is $ 400,000 / 10,000 units.
Labor	350,000.00	35.00	This is $ 350,000 / 10,000 units.
Cost of additional 1,000 units.	Per Unit	Amount
Units	1,000.00
Sales revenue	200.00	200,000.00	This is 1,000 units $ sell price per unit i.e. $ 200.
Materials	40.00	40,000.00	This is 1,000 units $ Materials cost per unit i.e. $ 40.
Labor	35.00	35,000.00	This is 1,000 units $ Labor cost per unit i.e. $ 35.
Variable cost		4,000.00	This is 8 batches* $ 500 per batch.
Income Statement
	1000
Sales revenue	200,000.00
Less: Variable costs
Materials	40,000.00
Labor	35,000.00
Variable cost	4,000.00
Total Variable costs	79,000.00
Contribution	121,000.00
Final Answer
The Medal Plus Company will gain $121,000 if it accepts the offer. So the offer should be accepted.
Fixed cost are sunk cost and irrelevant to this offer so not considered.
Requirement 2
Capacity of company	10,500.00
Less: Units to be sold under special offer	1,000.00
Capacity remaining	9,500.00
Less: Normal demand	10,000.00
Normal demand lost due to special offer	500.00
Calculation of contribution lost on 500 units
	Per Unit	Amount
Units	500.00
Sales revenue	250.00	250,000.00	This is 1,000 units $ sell price per unit i.e. $ 200.
Less:
Materials	40.00	40,000.00	This is 1,000 units $ Materials cost per unit i.e. $ 40.
Labor	35.00	35,000.00	This is 1,000 units $ Labor cost per unit i.e. $ 35.
Variable cost		1,500.00	This is 3 batches* $ 500 per batch.
Contribution lost		173,500.00
Contribution from special offer		121,000.00
Incremental loss		52,500.00
The Medal Plus Company will lose $52,5000 if it accepts the offer. So the offer should not be accepted.
Fixed cost are sunk cost and irrelevant to this offer so not considered.