Question

Quinn machines company is evaluating two customer orders. It can accept only one because of capacity limitations. The data associated with each order follow.

Cost Category Order A Order B Contract price $400,000 $335,000 Unit-level materials 150,000 118,000 Unit-level labor 137,000 107,400 Unit-level overhead 53,000 49,000 Supervisor's salary 40,000 40,000 Rental equipment costs 10,000 12,000 Depreciation on tools (zero market value) 14,000 14,000 Allocated portion of companywide facility-sustaining costs 4,000 3,600 Insurance coverage 27,000 27,000

Required

A. Assume that Quinn has decided to accept one of the two orders. Identify the information relevant to selecting one order versus the other. Recommend which job to accept, and support your answer with appropriate computations.

B. The customer presenting Order A has withdrawn it because of its financial hardship. Under this circumstance, Quinn's choice is to accept or reject Order B alone. Identify the information relevant to this decision. Recommend whether to accept or reject Order B. Support your answer with appropriate computations.

Answer 1

A. Incremental analysis reveals that Order A should be selected.

	Order A	Order B	Incremental analysis (Order A - Order B)
Contract price (Sale value)	400000	335000	65000
Less:
Unit-level materials	150000	118000	32000
Unit-level labour	137000	107400	29600
Unit-level overhead	53000	49000	4000
Supervisor's salary	40000	40000	0
Rental equipment costs	10000	12000	-2000
Depreciation on tools	14000	14000	0
Allocated portion of company-wide facility-sustaining costs	4000	3600	400
Insurance coverage	27000	27000	0
Profit	-35000	-36000	1000
Order A should be selected

B.

If Order B is not accepted, it is assumed that the costs like supervisor's salary, rental equipment costs, unit level materials, unit level labour, unit level overheads can be avoided. It is assumed that insurance coverage is for the facility to prevent loss from fire, burglary etc. and so cannot be avoided. So, if order B is not accepted and the facility is kept idle, the company will still incur depreciation on tools (as market value is nil), allocated portion of company-wide facility-sustaining costs and insurance coverage totalling $44600. Order B should be accepted as the order is contributing to reducing the unavoidable loss to $36000 from $44600.  

However if we assume that insurance coverage is avoidable cost (insurance coverage on inventory and not on the facilities), then the company will still incur $17600 which will be a lesser loss than when order B is accepted. So if insurance coverage is avoidable cost and is entirely due to order B, then order B should not be accepted.