Question

Green Grow Inc. (GGI) manufactures lawn fertilizer. Because of the product’s very high quality, GGI often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI’s operating capacity is 22,000 one-hundred-pound bags per month, and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000 one-hundred-pound bags of fertilizer for $130,000 from APAC, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a one-time $2,500 cost for GGI. The special order would be processed in two batches of 2,500 bags each. (No incremental batch-level costs are anticipated. Most of the batch-level costs in this case are short-term fixed costs, such as salaries and depreciation.) The following information is provided about GGI’s current operations:

Sales and production cost data for 20,000 bags, per bag:
Sales price	$	40
Variable manufacturing costs		17
Variable selling costs		3
Fixed manufacturing costs		12
Fixed marketing costs		4

No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags.

How to calculate TOTAL Relevant Costs and Break-even Selling Price per unit? I have been able to figure out the rest of the problem. Thank you!

Answer 1

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Green Grow Inc.
Green Grow Inc.'s current capacity is 22,000 units. It sells only 20,000 units. So it has excess unutilized capacity of 2,000 units.
It has received special order of 5,000 units which it has to supply in full. For that is has to lose its normal sales of 3,000 units i.e. total special order units less unutilized capacity. On that 3,000 units it will lose the contribution which is a relevant cost in this case.
Workings are below:
Calculation of cost of production od additional 2,000 units. Please note that all fixed costs are sunk costs and are no considered for decision making process.
	Amount $
Variable manufacturing costs	17.00
Units	5,000.00
Total cost of production	85,000.00
Calculation of contribution lost on existing 3,000 units.
Sell price	40.00
Less:
Variable manufacturing costs	17.00
Variable selling costs	3.00
Variable costs	20.00
Contribution per unit	20.00
Units	3,000.00
Contribution lost	60,000.00
Calculation of total cost of 2,000 units.	Amount $
Total cost of production	85,000.00
Contribution lost	60,000.00
Delivery & other packaging	2,500.00
Total relevant costs	147,500.00	This is answer 1
Units	5,000.00
Breakeven price per unit	29.50	This is answer 2
The price quoted for special order is $ 130,000 but total relevant cost is $ 147,500. As cost is more than order value so order should not be accepted.