Question

11.7. 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 33,000 one-hundred-pound bags per month, and it currently is selling 31,000 bags manufactured in 31 batches of 1,000 bags each. The firm just received a request for a special order of 7,200 one-hundred-pound bags of fertilizer for $200,000 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 $4,400 cost for GGI. The special order would be processed in two batches of 3,600 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 31,000 bags, per bag:
Sales price		$46
Variable manufacturing costs		12
Variable selling costs		3
Fixed manufacturing costs		21
Fixed marketing costs		7

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 7,200 bags.

Required:

1. What is the total relevant cost of filling this special sales order?

2. What would be the change in operating income if the special order is accepted?

3. What is the break-even selling price per unit for the special sales order (i.e., what is the selling price that would result in a zero effect on operating income)?

4. Prepare comparative income statements, using the contribution format, for both the current situation and assuming the special order is accepted at the break-even price determined in requirement 3.

Current Situation Current Situation + Special Sales Order Sales: Regular Special order Less: Variable costs: Manufacturing Marketing Contribution margin Less: Fixed costs: Manufacturing Marketing One-time packing/delivery Operating income

Answer 1

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Answers are highlighted in yellow: Naming and format is not available, can be slightly different: Solution: (7200*12) Variable Manufacturing cost One time cost Opportunity cost/CM lost Total Relevant Cost 86400 4400 161200 252000 (46-12-3)*(5200) Incremental revenue Less: Relevant cost Operating Income Decreased by 200000 -252000 -52000 sign can be +/- 3) Total Relevant Cost Units Break Even Selling price 252000 7200 $ 35.00 Current Situation Current Special 1426000 1426000 1186800 252000 1438800 372000 93000 396000 77400 Sales: Regular @ 46 Special order @ 44.50 Less: Variable Costs: Manufacturing Marketing Contibution Margin Less: Fixed Costs: Manufacturing Marketing One-time Packing/Delivery Operating Income 465000' 961000 473400|(33000-7200)*3 965400 651000 217000 868000 651000 217000 868000 4400 93,000 $ 93,000 $