Question

Ironwood Company manufactures a variety of sunglasses Production information for its most popular line, the Clear Vista (CV), follows: Per Unit $ 41.50 Sales price Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing cost OOK Berence Suppose that Ironwood has been approached about producing a special order for 1800 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 $35.00 per unit in the special order Additional costs for the special order total $4.00 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

Answer 1

Solution 1:

Contribution margin per unit from special order = Selling price - variable cost per unit

= $35 - ($10 + $7 + $6 + $4) = $8 per unit

Additional contribution margin on acceptance of special order = 1800*$8 = $14,400

Solution 2a:

Current contribution margin per unit = $41.50 - ($10 + $7 + $6) = $18.50 per unit

Solution 2b:

No, ironwood should not accept the special order it will result in decrease in income of ironwood as special order price is lower than regular price.

Solution 3:

Special order price per unit at which ironwood is indifferent between accepting or rejecting the special order = Regular selling price + Additional cost per unit on special order = $41.50 + $4 = $45.50 per unit