Question

Ironwood Company manufactures a variety of sunglasses. Production information for its most popular line, the Clear Vista (CV), follows: Sales price Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing cost Per Unit $46.50 15.00 10.00 6.00 5.00 $36.00 Suppose that Ironwood has been approached about producing a special order for 2,300 units of custom CV sunglasses for a new semiprofessional volleyball league. All units in the special order would be produced in the league's signature colors with a specially designed logo emblem attached to the side of the glasses. The league has offered to pay $44.00 per unit in the special order. Additional costs for the special order total $1.00 per unit for mixing the special frame color and purchasing the emblem with the league's logo that will be attached to the glasses. Required: 1. Assume Ironwood has the idle capacity necessary to accommodate the special order. Calculate the additional contribution margin Ironwood would make by accepting the special order. 2-a. Calculate the current contribution margin per unit. 2-b. Suppose Ironwood is currently operating its production facility at full capacity and accepting the special order would mean reducing production of its regular CV model. Should Ironwood accept the special order in this case? 3. Calculate the special order price per unit at which Ironwood is indifferent between accepting or rejecting the special order. Complete this question by entering your answers in the tabs below. Req1 Req 2A Req 2B Req3 Assume Ironwood has the idle capacity necessary to accommodate the special order. Calculate the additional contribution margin Ironwood would make by accepting the special order. Additional CM

Answer 1

(1) Additional CM :-

(Units sold * SP) – (Units sold * VC)

VC pu = DM + DL + Variable OH + Additional cost

    = $15 + $10 + $6 + $1 = $32

(2300 * $44) – (2300 * $32) = $27600

(2a) Current CM per unit :-

SP pu – VC pu

VC pu = DM + DL + Variable OH

= $15 + $10 + $6 = $31

$46.50 - $31 = $15.50

(2b) Ironwood is currently operating at full capacity.

If ironwood accepting the special order, there is need to reduce regular sale

Regular Contribution pu = $15.50

Special order contribution = $44 - $32 = $12

There is no need to accept special order

(3) Special order price per unit for indifference is:-

Contribution of Regular sale + VC of special order

$15.50 + $32 = $47.50