Question

INICIUNUVITY IN NUMMULUIT UPPNU IU WIL YUCULUI UISPYCUDEIUV. Winner's Circle, Inc., manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 2,700 medals each month. Current monthly production is 2,025 medals. The company normally charges $530 per medal. Variable costs and fixed costs for the current activity level of 75 percent of capacity are as follows: $ 263, 250 232,875 151,875 $ 648,000 Production Costs Variable costs: Manufacturing: Direct labor Direct material Marketing Total variable costs Fixed costs: Manufacturing Marketing Total fixed costs Total costs Variable cost per unit Fixed cost per unit Average unit cost $ 207,450 177, 300 $ 384,750 $1,032,750 320 190 → 510 Winner's Circle has just received a special one-time order for 675 medals at $305 per medal. For this particular order, no variable marketing costs will be incurred. Cathy Donato, a management accountant with Winner's Circle, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it. After examining the costs, Donato suggested to her supervisor, Gerard LePenn, who is the controller, that they request competitive bids from vendors for the raw material as the current quote seems high. LePenn insisted that the prices are in line with other vendors and told her that she was not to discuss her observations with anyone else. Donato later discovered that LePenn is a brother-in-law of the owner of the current raw-material supply vendor. 2-a. Compute both the new average unit cost and the incremental unit cost for the special order. 2-b. Should Winner's Circle, Inc. accept the special order?

Answer 1

While making decision of accepting or rejecting special order only relevant costs are considered. Fixed costs are constant and will not be affected by acceptance of the special order.

It is given that there will be no incremental variable marketing cost for special order.

Variable costs		2700 medals(2025+675)
Direct labor	$130($263,250/2025)	$351,000($130*2700)
Direct material	$115($232,875/2025)	$310,500 ($115*2700)
Marketing cost		$151,875
Total variable costs		$813,375 (351,00+310,50+151,875)
Fixed costs	they will remain constant as given	$384,750
	Total costs	$1,198,125(813,375+384,750)
	units	2700 medals
	average cost per unit	$443.75($1,198,125/2700)

incremental unit cost which increases with acceptance of special order

=variable direct labor+variable direct material

=$130+$115 [as calculated above]

Incremental unit cost =$245

2b . Yes, winner's should accept the special order as the incremental cost ($245 per unit) is lesser than incremental revenue ($305) so it will increase net income by ($305-$245)*675 medals = $40,500 increase in net income.