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Baird Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batche

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Answer

a. (Relevant) Cost per Unit $60.00
Should Baird accept the special order No
b. (Relevant) Cost per Unit $54.00
Should Baird accept the special order Yes

Calculations

a) Relevant Cost for 400 Blankets

Particulars Amount

Material Costs ($27*400)

Labour Cost ($21*400)

Manufacturing Supplies ($2*400)

Batch-Level Costs (1 batch* $4,000)

$10,800

$8,400

$800

$4,000

Total Costs $24,000

So,Relevant Cost per unit for special order of 400 blankets = Total Costs/Units

= $24,000/400

   = $60.00 per unit

No,Baird should not accept the special order.

Since the offer price ($58) is less than the relevant cost ($60),Baird should not accept the special order.The Company will incur a loss of $2 per unit if the special order is accepted.

b) Relevant Costs for 1000 Blankets

Particulars Amount

Material Costs ($27*1000)

Labour Costs ($21*1000)

Manufacturing Supplies ($2*1000)

Batch Level Cost (1 batch*4000)

$27,000

$21,000

$2,000

$4,000

Total Costs $54,000

So,Relevant Cost per unit for special order of 1000 blankets = Total Costs/Units

= $54,000/1000

= $54.00 per unit

Yes,Baird should accept the special order.Since the offer Price($58) is more than relevant cost ($54),Baird should accept this special order.As a result,the company will incur a profit of $4 per unit.

Notes

  • Variable Costs are always relevant as they are incurred when order is actually produced.Here,Material Cost,Labour Costand Manufacturing Supplies are relevant costs since they are variable.
  • Batch Level Cost is also relevant cost as it is variable per batch.It's incurred as and when a new batch is produced.
  • Product-Level costs and Facility-Level Costs are irrelevant costs(sunk costs) as they continue to occur whether or not special order is accepted.So,they are not relevant to the decision of order and therefore ignored.
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