Problem 11-19
The Award Plus Company manufactures medals for winners of athletic events and other contests.
Its manufacturing plant has the capacity to produce 10,000 medals each month. Current
production and sales are 7,500 medals per month. The company normally charges $150 per
medal. Cost information for the current activity level is as follows:
Variable costs that vary with the number of units produced
Direct materials $262,500 $35.00
Direct manufacturing labor 300,000 $40.00
Variable costs (for setups, materials handling, quality control,
and so on) that vary with number of batches, 150 batches
X $500 per batch 75,000 $500.00
Fixed manufacturing costs 275,000
Fixed marketing costs 175,000
Total $1,087,500 $145.00
Award Plus has just received a special one-time-only order for 2,500 medals at $100 per medal.
Accepting the special order would not affect the company's regular business. Award Plus
makes medals for its existing customers in batch sizes of 50 medals (150 batches X 50 medals
per batch = 7,500 medals). The special order requires Award Plus to make the medals in 25
batches of 100 each.
1. Should Award Plus accept the special one-time only order for 2,500 medals at $100 per medal?
Incremental revenue $100 2,500 $250,000
Incremental costs
Variable manufacturing costs
Direct materials $35 2,500 $87,500
Direct manufacturing labor $40 2,500 100,000
Batch setup costs $500 25 12,500 $200,000
Incremental increase in operating income $50,000
Award Plus should accept the one-time-only special order provided that there are no
long-term implications. If accepting the special order would cause the regular
customers to be dissatisfied or to demand lower prices, then Award Plus will have to
trade off the $50,000 profit increase from accepting the special order against the
operating income that might be lost from regular customers.
2. Suppose plant capacity was only 9,000 medals instead of 10,000 medals each month. The
special order must either be taken in full or be rejected completely. Should Award Plus accept
the special order?
Incremental revenue $100 2,500 $250,000
Incremental costs
Variable manufacturing costs
Direct materials $35 2,500 $87,500
Direct manufacturing labor 40 2,500 100,000
Batch setup costs 500 25 12,500 $200,000
Incremental increase in operating income $50,000
Less operating income lost from normal sales given up
, Current sales to normal customers 7,500
Total capacity available 9,000
Used by special order 2,500 6,500
Lost regular sales (units) 1,000
Lost sales to regular customers @ $150 $150,000
Variable manufacturing costs saved
Direct materials $35 $35,000
Direct manufacturing labor $40 40,000
Batch setup costs 20 $500 10,000 85,000 65,000
Decrease in operating income ($15,000)
The special order should be rejected because if accepted operating income would
decrease by $15,000.
3. As in requirement 1, assume that monthly capacity is 10,000 medals. Award Plus is concerned
that if it accepts the special order, its existing customers will immediately demand a price discount
of $10 in the month in which the special order is being filled. They would argue that Award Plus's
capacity costs are now being spread over more units and that existing customers should get the
benefit of these lower costs. Should Award Plus accept the special order under these conditions?
Incremental revenue from special order $100 2,500 $250,000
Incremental costs from special order
Variable manufacturing costs
Direct materials $35 2,500 $87,500
Direct manufacturing labor 40 2,500 100,000
Batch setup costs 500 25 12,500 $200,000
Incremental increase in operating income from special order $50,000
Less decrease in operating income generated from normal sales (75,000)
Net decrease in operating income if special order is accepted ($25,000)
,her contests.
per unit
per unit
per batch
per unit
$128.75
The Award Plus Company manufactures medals for winners of athletic events and other contests.
Its manufacturing plant has the capacity to produce 10,000 medals each month. Current
production and sales are 7,500 medals per month. The company normally charges $150 per
medal. Cost information for the current activity level is as follows:
Variable costs that vary with the number of units produced
Direct materials $262,500 $35.00
Direct manufacturing labor 300,000 $40.00
Variable costs (for setups, materials handling, quality control,
and so on) that vary with number of batches, 150 batches
X $500 per batch 75,000 $500.00
Fixed manufacturing costs 275,000
Fixed marketing costs 175,000
Total $1,087,500 $145.00
Award Plus has just received a special one-time-only order for 2,500 medals at $100 per medal.
Accepting the special order would not affect the company's regular business. Award Plus
makes medals for its existing customers in batch sizes of 50 medals (150 batches X 50 medals
per batch = 7,500 medals). The special order requires Award Plus to make the medals in 25
batches of 100 each.
1. Should Award Plus accept the special one-time only order for 2,500 medals at $100 per medal?
Incremental revenue $100 2,500 $250,000
Incremental costs
Variable manufacturing costs
Direct materials $35 2,500 $87,500
Direct manufacturing labor $40 2,500 100,000
Batch setup costs $500 25 12,500 $200,000
Incremental increase in operating income $50,000
Award Plus should accept the one-time-only special order provided that there are no
long-term implications. If accepting the special order would cause the regular
customers to be dissatisfied or to demand lower prices, then Award Plus will have to
trade off the $50,000 profit increase from accepting the special order against the
operating income that might be lost from regular customers.
2. Suppose plant capacity was only 9,000 medals instead of 10,000 medals each month. The
special order must either be taken in full or be rejected completely. Should Award Plus accept
the special order?
Incremental revenue $100 2,500 $250,000
Incremental costs
Variable manufacturing costs
Direct materials $35 2,500 $87,500
Direct manufacturing labor 40 2,500 100,000
Batch setup costs 500 25 12,500 $200,000
Incremental increase in operating income $50,000
Less operating income lost from normal sales given up
, Current sales to normal customers 7,500
Total capacity available 9,000
Used by special order 2,500 6,500
Lost regular sales (units) 1,000
Lost sales to regular customers @ $150 $150,000
Variable manufacturing costs saved
Direct materials $35 $35,000
Direct manufacturing labor $40 40,000
Batch setup costs 20 $500 10,000 85,000 65,000
Decrease in operating income ($15,000)
The special order should be rejected because if accepted operating income would
decrease by $15,000.
3. As in requirement 1, assume that monthly capacity is 10,000 medals. Award Plus is concerned
that if it accepts the special order, its existing customers will immediately demand a price discount
of $10 in the month in which the special order is being filled. They would argue that Award Plus's
capacity costs are now being spread over more units and that existing customers should get the
benefit of these lower costs. Should Award Plus accept the special order under these conditions?
Incremental revenue from special order $100 2,500 $250,000
Incremental costs from special order
Variable manufacturing costs
Direct materials $35 2,500 $87,500
Direct manufacturing labor 40 2,500 100,000
Batch setup costs 500 25 12,500 $200,000
Incremental increase in operating income from special order $50,000
Less decrease in operating income generated from normal sales (75,000)
Net decrease in operating income if special order is accepted ($25,000)
,her contests.
per unit
per unit
per batch
per unit
$128.75
