Question

Blossom Packaging Company is a leading manufacturer of cardboard boxes and other product packaging solutions. One of the company’s major product lines is custom-printed cake boxes that are sold to some of the country’s best known bakeries at a price of $0.50 per box. To maintain its high-quality image, Blossom uses a thick premium coated paper for all of its cake boxes. Based on annual production of 1,000,000 boxes, Blossom’s cost for producing a box is as follows:

Paper		$0.12
Ink		0.04
Direct labor		0.05
Variable overhead		0.08
Fixed overhead		0.10
Total cost per box		$0.39

Andrea Borden, a recent graduate of the Culinary Institute of America, is opening a new bakery in her hometown. She recently contacted Brad Lail, Blossom’s top salesperson, about purchasing cake boxes for her new store. Brad described Blossom’s boxes, emphasizing the high-quality paper and the unique printing process the company uses. Andrea is looking for ways to lower her operating costs, so after hearing Brad describe Blossom’s boxes, she told him that all she needed was a simple, unprinted box. Andrea also told Brad that she needs 10,000 boxes and is willing to pay $0.22 per box.

(a) Based on Andrea’s offer of $0.22 per box for an unprinted box, should Blossom accept Andrea’s order? Blossom currently has excess production capacity and can easily accommodate Andrea’s order in the production schedule.

Blossom shouldshould not accept the order.

(b) Since Andrea wants a simple box, Brad is exploring using a lighter-weight paper for her boxes. He has found a suitable paper that will cost $0.07 per box. If Blossom uses this lighter-weight paper for Andrea’s boxes, should the company accept Andrea’s order at a price of $0.22 per box? Blossom currently has excess production capacity and can easily accommodate Andrea’s order in the production schedule.

Blossom should notshould accept the order.

(c) After visiting with Andrea, Brad received a fax from one of London’s top bakeries. The bakery’s normal box supplier suffered some fire damage and is unable to ship the bakery’s order of 10,000 boxes this month. The bakery’s owner is asking if Blossom can fill a onetime rush order of 10,000 boxes printed with the bakery’s logo. The bakery is willing to pay a 10% price premium to expedite the order. If Blossom accepts the order, it will incur $774 in export taxes and shipping.

Calcuate the Profit on special order.

Profit on special order

$

Should Blossom accept the London bakery’s offer?

Blossom shouldshould not accept the special order.

Answer 1

a)Variable cost varies with number of output thus it is a relevant cost to decision making as it is an incremental cost .Fixed cost is a cost that will be incurred irrespective of number of output produced or sold thus it is irrelevant to decision making.

Variable cost per unit :.12 +.04+.05+.08 = .29 per unit

Incremental profit /(loss) =Number of units [Special offer price -variable cost per unit]

               = 10000 [ .22 -.29]

              = 10000 * -.07

              = $ - 700

Offer should not be accepted as there is an incremental loss of 700 if offer is accepted.

b)Variable cost per unit :.07 +.04+.05+.08 = .24 per unit

Incremental profit /(loss) =Number of units [Special offer price -variable cost per unit]

               = 10000 [ .22 -.24]

              = 10000 * -.02

              = $ - 200

Offer should not be accepted as there is an incremental loss of 200 if offer is accepted.

c)Special offer price = regular price(1+% premium)

          = .50 (1+.10)

         =.50*1.1

         =$ .55

Incremental revenue (.55*10000)	5500
less:incremental variable cost(.29*10000)	(2900)
export taxes and shipping	(774)
incremental profit/(loss)	1826

Offer should be accepted as there is an incremental profit of 1826 if offer is accepted.