Question

Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops.

Currently, the company is operating at 90% capacity. A chain of drugstores has offered to buy

30,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized

with the drugstore chain’s logo. While the normal selling price is $6.00 per box, the chain has

offered just $3.10 per box. Sequoia can accommodate the special order without affecting

current sales. Unit cost information for a box of thank-you notes follows:

Direct materials

$1.87

Direct labor

0.33

Variable overhead

0.08

Fixed overhead

2.10

Cost per box

$4.38

Fixed overhead is $420,000 per year and will not be affected by the special order. Normally,

there is a commission of 5% of price; this will not be paid on the special order since the

drugstore chain is dealing directly with the company. The special order will require additional

fixed costs of $14,300 for the design and setup of the machinery to stamp the drugstore chain’s

logo on each box.

Answer 1

fix Sales revenue from special order B2 А В C D Е 1 Sales revenue from special order less: relevant costs $93,000 2 3 $56,100 $9,900 Direct materials 4 Direct labor 5 $2,400 $14,300 Variable overhead 6 Additional fixed costs 7 Total relevant costs Increase in Net Income $82,700 $10,300 10 Decision The special order should be accepted Reason Because the special order is providing additional net income of $10,300 11 12 13 st Ln

for formulas and calculations, refer to the image below -

Sales revenue from special order B2 В A C D 1 Sales revenue from special order less: relevant costs -3.1*30000 2 = 1.87*30000 0.33*30000 Direct materials 4 Direct labor 5 -0.08*30000 Variable overhead 6 Additional fixed costs 14300 7 Total relevant costs =SUM(C4:C7) 8 Increase in Net Income -D2 -D8 10 Decision The special order should be accepted 11 Because the special order is providing additional net income of $10,300 12 Reason 13 co LO LON

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