Question

Beau Trophies Inc. (BTI) manufactures trophies for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 15.000 medals cach month. Current monthly production and selling volume is at 90% of the capacity. The company normally charges $180 per trophy. Variable costs and fixed costs for the current activity level are as follows Variable costs: Direct material Direct labour Marketing Fixed costs: Manufacturing Marketing $540,000 810,000 405.000 300,000 120,000 BTI has just received a special one-time order for 2.500 at $120 per medal from Africa Inc., a South African company. For this order, 40% of variable marketing costs will be eliminated. Sofie Dossi, a management accountant with BTI, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it. After examining the costs, Sofie suggested to her supervisor, Stevie Wonder, who is the controller, that they request competitive bids from vendors for the raw materials, as the current purchase price seems high Stevie Wonder insisted that the prices are in line with those of other vendors and told her that she was not to discuss her observations with anyone else. Sofie later discovered that Stevie is a brother in-law of the owner of the current raw material supply vendor REQUIRED: 1. Present the income statement without the special order. Your calculations must show the operating income and contribution margin per unit. 2. Identify and explain the costs that will be relevant to Sofie Dossi's analysis of the special order being considered by BTI? Show calculations 3. Calculate the increase (decrease) in Operating Income from the special order. Should BTI accept the special order? If not, what is the minimum price it should accept?

Answer 1

1) INCOME STATEMENT

Capacity	90%
Units	13500
Selling price	$180
A. Total sales	$2430000
variable cost
Direct material @$40 pu	$540000
direct labor @$60 pu	$810000
variable marketing cost @$30 pu	$405000
B. total variable cost	$1755000
C. Contribution (B-A)	$675000
fixed costs
fixed manufacturing cost	$300000
fixed marketing cost	$120000
D. total fixed cost	$420000
E. Profit (C-D)	$255000

2)

For analysis of special order, variable costs are relevant as there will be no change in fixed cost with an increase in production. As variable marketing cost will be 60% of $30 now. New cost = $18

Following is the calculation of Cost for special order.

Units	2500
Selling price	$120
A. Total sales	$300000
variable cost
Direct material @$40 pu	$100000
direct labor @$60 pu	$150000
variable marketing cost @$18 pu	$45000
B. total variable cost	$295000
C. Contribution (B-A)	$5000

3) As there will be no change in other units, we are required to calculate for 2500 units only.

Capacity	special order	domestic order
Units	2500	2500
Selling price	$120	$180
A. Total sales	$300000	$450000
variable cost
Direct material @$40 pu	$100000	$100000
direct labor @$60 pu	$150000	$150000
variable marketing cost @$18 pu and $30 pu	$45000	$75000
B. total variable cost	$295000	$325000
C. Contribution (B-A)	$5000	$125000

As contribution is less in special order, income is decreasing .

Profit must be atleast $125000

So price must be = ($295000 + $125000) / 2500 =$168

Minimum acceptable price must be $168

4) In analysis of special order, it must be taken in consideration that if company accepts the order it will lose some of its domestic share. Cost of product must also be considered so as to earn huge profit through foreign sales. If company serves special order in a better way, it will recieve more such orders and may earn huge profit as well market share outside.

5) In order to stop such unethical practices, all information must be disclosed to upper management and shareholders. So that, legal actions can be taken against such practices.