Question

Managerial accounting, please show work

Cindy Richards, the manager of Rockford Company, was deliberating over an offer for an order requesting 7,000 boxes of birthday greeting cards. Rockford was operating at 70% of its capacity of 30,000 boxes and could use the extra business. Unfortunately, the order's offering price of $7.75 per box was below the cost to produce the cards. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred. Accepting the order would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a box of birthday greeting cards is provided below. The total fixed manufacturing costs would not change if the order is accepted. ROCKFORD COMPANY COSTS TO PRODUCE ONE BOX OF BIRTHDAY GREETING CARDS Direct Materials $ 2.00 Direct Labor 3.00 Variable Manufacturing Overhead 1.50 Fixed Manufacturing Overhead Total Full Manufacturing Cost The order is from a customer in a region not ordinarily serviced by the company. No variable selling or administrative expenses would be associated with the order. REQUIRED: (1) Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supporting computations. Consider the personnel manager's concerns. Discuss the merits of accepting the order even if it decreases total profits. (2)

Answer 1

Requirement 1: Accepting or Rejecting a Special order decisions are taken considering incremental costs. For these decisions variable Manufacturing Costs are relevant costs and fixed costs are not relevant for Special Order Decisions because they are not changed and already incurred. So, Incremental Cost Per box of Birthday Greeting card with respect to special order is calculated as below. o alla $ A Direct Materials Direct Labor Variable Manufaturing Overhead Total Cost Per Box 2.00 3.00 1.50 6.50 $ $ Income Per Box from Special order = $7.75 - $6.50 = $1.25 Total Income From Special Order = 7000 x $1.25 = $8,750.00 Accepting Special Order results additional Income of $8,750. So Special Oder Should be Accepted. Requirement 2: Accepting Special Order would avoid the problems of layoffs and it will help to maintain image of the company among the community. Unused capacity will fulfilled if special order accepted. Company shall take care to satisfy demands of existing customers while accepting special orders and if it fails to do so, company may loose existing customers.