Question

Ironwood Company manufactures a variety of sunglasses. Production information for its most popular line, the Clear Vista (CV), follows:

	Per Unit
Sales price	$	44.50
Direct materials		13.00
Direct labor		10.00
Variable manufacturing overhead		4.00
Fixed manufacturing overhead		5.00
Total manufacturing cost	$	32.00

Suppose that Ironwood has been approached about producing a special order for 2,100 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 $40.00 per unit in the special order. Additional costs for the special order total $2.00 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-a. 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.

Answer 1

1 Calculation of additional contribution margin ironwood would make by accepting the the special order 10 Particulars Amt & Sales Q100 @ 40 each) $ 84,000 less: Variable cost Direct Material -$13 Direct labor Variable OH 4 Additional cost 2 2 60,900 2100@ $29 each $ 23,100 . Additional contribution margin = $ 23,100 Contribution margin 2 (a) Calculation of Contribution margin (custent) per unito - Current contribution Margin - Selling price - Variable cost per unit per unit per unit Variable cost per unit Direct material + Direct Cabor + variable OH 13+10+4 = $27 selling price per unit = $44.50 :: Current Contribution margin $44.50 - $ 27 per unito = $17.50 = $17.50 il Current contribution per unit :

order 2(b) Suppose ironwood is currently operating its pooduction facility at full capacity and accepting the special order. would mean medicing production should soonwood accept special order in this case? let us compose regular contribution courth special Regube contri Bution = $ 17:50 per comit Special order contribution = $23100 $ 11 per unit Hence, Ironwood should not accept 3. Special order price per unit at cehich soonwood is indifferent between accepting or rejecting special order 2100, the special Order Particulars Amt & Contribution per unit of normal sale $17:50 Addy Variable cost of $ 29 Special order price for indifference $46.50 Special Order