Question

SPECIAL ORDER DECISION

Pinto Manufacturing. has a capacity of producing 300,000 units a year and sells them at $28 a unit. Fixed overhead is budgeted at $1,200,000 while fixed administration costs are estimated to be $450,000.

At present Pinto is selling 250,000 units. A foreign distributor has made a one-time offer to purchase 40,000 units at $20 a unit. The customer will pay all freight costs and no commissions will be paid on this order, so variable selling costs will be reduced by 40%.

The sales manager has collected the following per-unit data on Pinto’s operating costs:

                                                                           Per Unit

                                          Direct Materials         $ 3.00

                                          Direct labor                    7.50

                                          Variable overhead        6.00

                                          Variable selling             3.50

                                          Fixed overhead             4.00              

                                          Fixed administration   1.50

                                                   Total                 $ 25.50

REQUIRED:

1. Determine if the order, as stated, should be accepted or rejected. How much better off will Pinto be if they follow your recommendation?

                    -

2. What’s the “real cost” of this special order to Pinto?

3. What is the minimum acceptable price which could be accepted?

4. NOW imagine that Pinto was operating at capacity, and that this order would displace other orders. How would this change your answer? Why? What would be the new minimum acceptable price?

Answer 1

ediecapan oith existing If One-time sedexes to be pleoduced out Computation of contribution pollo with ex cost structure &- Paper Particulares Amount e Selling Price p.u. Direct Materials p.u Direct labour P.u. Variable overheads P. u. Vaxiable selling Overheads Piu. Total variable cost Pollo contribution p.u. 3.00 7.50 6.00 3:50. 2. Computation of variable cost and contajbution pill, for special order of 40000 units call Particulars Amount Selling Price p.u. Direct materials p.u. Direct labour P.U. Variable ouerheads P.U. Variable selling ouerheads p.u. (3.50 -40%) variable cost p.u. contribution p.u. 120 03.00 750 6.oova 2.101 18.60 1.40

ne capacity zing Note 8. Since fixed Overheads and fixed administration Icosts would be absorbed by first 25oooo units, those a PyyelCNADE for decision making 0 Special Order 40.000 units 2. De into mental CORP+ by Perfilm ent_Q Special oxdex: Contribution pollX NO units = 1.40 X 40000 unik LOL = $ 56000 den Bio Decision- The special one-time order should be accepted b Pinto Manufacturing, as it would fetch an exrea contributi $ 56000 to them, The Greal cost of the one time offer to Pinto is the variable cost of manyacturing 40000 units le $744000 ($18060 x 40000 units), and the minimum acceptable perce at which Pinto will be at no para (no loss would also be it's variable cost pollo pe $18.60 p.u. * If Pinto was operating at full capacity Pue 300000 lunits, accepting one - Hme Otter q 40000 units from la foxiegn distributor would lead to a loss of 40000 units that are sold by pinto in ordinary business / domestic market. Therefore, in such case, the opportunity cost of 40000 units shall also be

Puga Mo Date price in taken Pnto consideration celle quoling pee one - time offor. In this scenario, the new acceptable parco cuould be calculated as follows - po Amou Amount (6) 18.60 8. non portularsiz ud +990ea lolaad variable cost Poll. cas calculated earlier) Add : Opportunity cost (con leibution foregone on 40000 units) woooow on Revised minimum acceptable price. for 40000 units cone time offer) 26-60, Smootto in HOLD O lden DODOX Ə817) 120