Question

Badger Valve and Fitting Company, located in southern Wisconsin, manufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70 percent capacity and is earning a satisfactory return on investment. Management has been approached by Glasgow Industries Ltd. of Scotland with an offer to buy 100,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Badger’s pressure valve; however, a fire in Glasgow Industries’ valve plant has shut down its manufacturing operations. Glasgow needs the 100,000 valves over the next four months to meet commitments to its regular customers. Glasgow is prepared to pay $26.00 each for the valves. Badger’s total product cost, based on current attainable standards, for the pressure valve is $27.50, calculated as follows:

Direct material	$	7.00
Direct labor		8.50
Manufacturing overhead		12.00
Total product cost	$	27.50

Manufacturing overhead is applied to production at the rate of $30 per standard direct-labor hour. This overhead rate is made up of the following components.

Variable manufacturing overhead	$	10.00
Fixed manufacturing overhead (traceable)		13.00
Fixed manufacturing overhead (allocated)		7.00
Applied manufacturing overhead rate	$	30.00

Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5 percent and freight expense of $1.50 per unit. However, the company does not pay sales commissions on special orders that come directly to management. In determining selling prices, Badger adds a 40 percent markup to total product cost. This provides a $38.50 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $37.00 in order to maintain market share. Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $15,000 per month in the form of supervision and clerical costs. If management accepts the order, 25,000 pressure valves will be manufactured and shipped to Glasgow Industries each month for the next four months. Glasgow’s management has agreed to pay the shipping charges for the valves.

1. Determine how many direct-labor hours would be required each month to fill the Glasgow Industries order.

2. 	Direct-labor hours

3. Prepare an analysis showing the impact of accepting the Glasgow Industries order. (Round "Per unit" answers to 2 decimal places.)

	Per Unit Totals for 100,000 Units Incremental revenue Incremental costs: Variable costs: Direct material Direct labor Variable overhead Total variable costs $0.00 $0 Fixed overhead: Supervisory and clerical costs Total incremental costs $0 Total incremental profit $0

3. Calculate the minimum unit price that Badger Valve and Fitting Company’s management could accept for the Glasgow Industries order without reducing net income. (Round your answer to 2 decimal places.)

	Minimum unit price

4. Identify the factors, other than price, that Badger’s management should consider before accepting the Glasgow Industries order. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

• Management composition of Glasgow Industries.unanswered
• The company’s relevant range of activity and whether or not the special order will cause volume to exceed this range.unanswered
• Other possible production orders that could come in and require the capacity allocated to the Glasgow job.unanswered
• Sales volume of Glasgow Industries.unanswered
• The effect on machinery or the scheduled maintenance of equipment.unanswered
• The effect of the special order on Badger’s sales at regular prices.unanswered
• The possibility of future sales to Glasgow Industries and the effects of participating in the international marketplace.

Answer 1

1) Calculation of Direct Labor hours Manufacturing overhead per hour Manufacturing overhead included in product cost Standard labor hours required per unit (12/30) Product of Units each month Direct labor hours required each month (25,000 x 0.40 30 lper hour 12 lper unit 0.40 hours per unit 25,000 10,000 hours Direct Labor hours 10,000 2) Incremental Analysis Per unit Totals for 100,000 units [Per unit x 100,000 units] 26.00 $ Incremental Revenue Incremental Costs: Variable Costs: Direct Material Direct Labor Variable Overhead Total Variable Cost Fixed Overhead Supervisor and Clerical costs (15,000 x 4 Months) Total Incremental Costs Total Incremental Profit (2,600,000 2,010,000) 2,600,000 7.00 8.50 4.00 700,000 850,000 400,000 1,950,000 19.50 $ 60,000 2,010,000 590,000 Note: Variable manufacturing overhead per hour Standard direct labor hour per unit Variable manufacturing overhead per unit (10 x 0.40) $ 10 0.40 hour per unit 4 per unit

3) Minimum Unit Price Variable Costs: Direct Material Direct Labor Variable Overhead Total Variable cost per unit Add: Additional fixed costs Minimum Unit Price 7.00 8.50 4.00 19.50 0.60 20.10 Minimum Unit Price 20.10 Working Notes: Additional fixed cost Number of units produced Fixed cost per unit (60,000/100,000 $60,000 100,000 0.60 4)Badger Valve and Fitting Company should consider the following factors before accepting the order The company's relevant range of activity and whether or not the special order will cause volume to exceed this range VThe effect on machinery or the scheduled maintenance of equipment. V The effect of the special order on Badger's sales at regular prices The possibility of future sales to Glasgow Industries and the effects of participating in the international marketplace