Question

Green Grow Inc. (GGI) manufactures lawn fertilizer. Because of the product’s very high quality, GGI often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI’s operating capacity is 27,000 one-hundred-pound bags per month, and it currently is selling 25,000 bags manufactured in 25 batches of 1,000 bags each. The firm just received a request for a special order of 6,000 one-hundred-pound bags of fertilizer for $151,000 from APAC, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a one-time $4,000 cost for GGI. The special order would be processed in two batches of 3,000 bags each. (No incremental batch-level costs are anticipated. Most of the batch-level costs in this case are short-term fixed costs, such as salaries and depreciation.) The following information is provided about GGI’s current operations: Sales and production cost data for 25,000 bags, per bag: Sales price $ 43 Variable manufacturing costs 16 Variable selling costs 4 Fixed manufacturing costs 15 Fixed marketing costs 5 No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 6,000 bags. Assume that the $15.00 fixed manufacturing overhead cost per unit consists of facility-level costs ($12.00/unit at the 25,000-unit output level), with the remainder being set-up-related (i.e., batch-level) costs. Assume that the set-up related costs increase in total with the number of batches produced and that the facility-level fixed costs do not vary in total, either with the number of units produced or the number of batches produced during a period.

1. What is the total fixed manufacturing overhead cost for the period? Break down (that is, decompose) this total cost into its component parts (i.e., batch-related overhead costs and facility-related fixed overhead costs). 2. Calculate the relevant unit and total cost of the special order, including the new information about batch-related costs. Assume, as before, the one-time delivery cost of $4,000.

Answer 1