Question

Winner’s Circle, Inc. manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 3,400 medals each month. Current monthly production is 2,550 medals. The company normally charges $490 per medal. Variable costs and fixed costs for the current activity level of 75 percent of capacity are as follows:

Production Costs
Variable costs:
Manufacturing:
Direct labor	$	510,000
Direct material		165,750
Marketing		191,250
Total variable costs	$	867,000
Fixed costs:
Manufacturing	$	209,100
Marketing		147,900
Total fixed costs	$	357,000
Total costs	$	1,224,000
Variable cost per unit	$	340
Fixed cost per unit		140
Average unit cost	$	480

Winner’s Circle has just received a special one-time order for 850 medals at $295 per medal. For this particular order, no variable marketing costs will be incurred. Cathy Donato, a management accountant with Winner’s Circle, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it. After examining the costs, Donato suggested to her supervisor, Gerard LePenn, who is the controller, that they request competitive bids from vendors for the raw material as the current quote seems high. LePenn insisted that the prices are in line with other vendors and told her that she was not to discuss her observations with anyone else. Donato later discovered that LePenn is a brother-in-law of the owner of the current raw-material supply vendor.

1. 2-a. Compute both the new average unit cost and the incremental unit cost for the special order.
2. 2-b. Should Winner’s Circle, Inc. accept the special order?

Answer 1

2-a.

2-b

As we can see above, the net income has increased and average cost per unit is reduced. So, Winner’s Circle, Inc. Should accept the special order.