Question

Special-Order Decision, Alternatives, Relevant Costs

Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 90 percent of capacity. A chain of drugstores has offered to buy 34,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized with the drugstore chain’s logo. While the normal selling price is $6.10 per box, the chain has offered just $3.40 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows:

Direct materials	$2.05
Direct labor	0.35
Variable overhead	0.08
Fixed overhead	2.05
Total cost per box	$4.53

Fixed overhead is $397,000 per year and will not be affected by the special order. Normally, there is a commission of 7 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $14,100 for the design and setup of the machinery to stamp the drugstore chain’s logo on each box.

Required:

1. Which alternative is more cost effective and by how much?

The operating income would increase by $.

2. What if Sequoia Paper Products was operating at capacity and accepting the special order would require rejecting an equivalent number of boxes sold to existing customers? Which alternative would be better?  

Answer 1

solution: Dcomputation of financial advantage ( disadvantage) from Accepting special order-sequoia paper Products Inc. per unit Total (S) Increase in sales revenue. $3.4 $115,600 Less: variable costs Direct Material $2.05) $(691700) Direct Labor... $10.35) $111.900) variable overhead $10.08) $(2,720) Contribution margin . $0.92 Less: Additional facea casti $(14,000) Increase in operating $17,180 . Income I accepting the special offer is more cose effective and the operating Income will increase by $17, 180. Explanations y units = 34,000 ; Total = units x per unit.

2) computation of contribution margin if sold to existing customers asequoia paper product's Inc. perunit. Totalls) sales price $6.10 $207,400 Less: variable costs Direct Material. $12.05) $189,700) Direct. Labor $10:35) $(11,905) variable overhead .. $10.08) $(2,720) Commission ($6.10XT() $10.427) $(14,518) contribution Margin $3.193 $108,562 ... If special order is accepted overall Loss as will be a Benefit from special order- Loss of contribution margin from existing customers. = $17,180 - $108,562 => $(91,382)-> LOSS. Hiencé Rejecting the special order is better. Explanation Units - 32,000; Total = units * per unit.

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