Question

onwood 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 $ 50.50 19.00 10.00 5.00 $ 39.00 Suppose that Ironwood has been approached about producing a special order for 2.700 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 $4700 per unit in the special order Additional costs for the special order total $3.00 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-. 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. Reg 2A Reg 2B Reg 3 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. Adational CM Reg 2 >

Answer 1

Answer:

1. Sale price per unit = $47.00

Less: variable costs:

Direct Material = $19.00

Direct labor = $10.00

Variable manufacturing overhead = $5.00

Additional cost for special order per unit = $3.00

Contribution per unit = $10.00

Additional contribution margin

= No. of units of order*contribution per unit of special order

= 2,700*$10.00

= $27,000

2-a. Current contribution per unit

Sale price per unit = $50.50

Less: variable costs:

Direct Material = $19.00

Direct labor = $10.00

Variable manufacturing overhead = $5.00

Current Contribution margin per unit = $16.50

2-b. If ironwood is currently operating at its full capacity and accepting the special order would mean reducing production of its regular CV model would reduce its contribution of $6.50 per unit on the units sold and the amount contributed towards the fixed costs would be reduced and in total reduces the net income.

In such a case special order should not be accepted. This decision is based purely on financial perspective.

3. Special order price at which ironwood is indifferent between accepting or rejecting order:

Case1: Operating at full Capacity and may require some additional fixed costs then Price would be $48.5+Additional fixed costs [$47.00 Sale price + $6.50 lost contribution - $5.00 Fixed Manufacturing overhead]

Case2: Operating at full capacity but by reducing the production of its regular CV model then price would be $53.5  [$47.00 Sale price + $6.50 lost contribution]

Thank You.