Question

Problem 8-20 Sunland Packaging Company is a leading manufacturer of cardboard boxes and other product packaging solutions. One of the company's major product lines is custom-printed cake boxes that are sold to some of the country's best known bakeries at a price of $0.50 per box. To maintain its high-quality Image, Sunland uses a thick premium coated paper for all of its cake boxes. Based on annual production of 1,000,000 boxes, Sunland's cost for producing a box is as follows: Paper Ink Direct labor Variable overhead Fixed overhead Total cost per box $0.14 0.04 0.05 0.09 0.09 $0.41 Andrea Borden, a recent graduate of the Culinary Institute of America, is opening a new bakery in her hometown. She recently contacted Brad Lail, Sunland's top salesperson, about purchasing cake boxes for her new store. Brad described Sunland's boxes, emphasizing the high-quality paper and the unique printing process the company uses. Andrea is looking for ways to lower her operating costs, so after hearing Brad describe Sunland's boxes, she told him that all she needed was a simple, unprinted box. Andrea also told Brad that she needs 10,400 boxes and is willing to pay $0.25 per box. (a) Based on Andrea's offer of $0.25 per box for an unprinted box, should Sunland accept Andrea's order? Sunland currently has excess production capacity and can easily accommodate Andrea's order in the production schedule. Sunland 9 accept the order. (b) Since Andrea wants a simple box, Brad is exploring using a lighter-weight paper for her boxes. He has found a suitable paper that will cost $0.09 per box. If Sunland uses this lighter-weight paper for Andrea's boxes, should the company accept Andrea's order at a price of $0.25 per box? Sunland currently has excess production capacity and can easily accommodate Andrea's order in the production schedule. Sunland accept the order. (C) After visiting with Andrea, Brad received a fax from one of London's top bakeries. The bakery's normal box supplier suffered some fire damage and is unable to ship the bakery's order of 10,400 boxes this month. The bakery's owner is asking if Sunland can fill a onetime rush order of 10,400 boxes printed with the bakery's logo. The bakery is willing to pay a 10% price premium to expedite the order. If Sunland accepts the order, it will incur $812 in export taxes and shipping. Calcuate the Profit on special order. Profit on special order $ Should Sunland accept the London bakery's offer? Sunland 9 accept the special order.

Answer 1

Since there is excess capacity, no additional fixed costs will be incurred on the order

Relevant cost per unit = 0.14+0.05+0.09

= $0.28

Should not accept

b.Relevant cost = 0.09+0.05+0.09

= $0.24

Yes, should accept

c.Profit = (0.5*110%-0.14-0.04-0.05-0.09)*10,400 – 812

= $1,580

d.Yes