Question

Award Plus manufactures medals and trophies for winners of athletic competitions and other
contests. Award Plus’s manufacturing plant has the capacity to produce 10,000 medals per
month. Currently, Award Plus is operating at 75% of available capacity, producing 7,500 medals
per month. Pertinent data for this level of operations follows:
Medals produced and sold 7,500
Selling price $175 per medal
Fixed costs:*
Manufacturing $46 per medal
Marketing & administrative $34 per medal
Variable costs:
Direct materials $50 per medal
Direct labor $40 per medal
Profit $5 per medal
* Award Plus calculates fixed costs per medal by dividing
the annual fixed cost by the number of medals it expects
to produce during the year.
Recently, Award Plus received an inquiry from a national Little League baseball organization
about the possibility of producing 1,800 medals next month. The Little League organization
plans to give the medals to the winners of the upcoming state tournaments. Since there are 50
states, 3 age brackets, and approximately 12 players per team, the organization needs 1,800
medals (i.e., 1,800 = 50 * 3 * 12). The Little League organization, however, indicates that they
are somewhat strapped for cash and can only pay $100 for each medal.
Required
a. By how much will Award Plus’s profit increase or decrease if it accepts the special order?
Please show all your calculations.
b. Assume that Award Plus’s manufacturing plant has the capacity to produce only 9,000
medals per month rather than 10,000 medals per month. This means that if Award Plus
accepts the special order, it will have to forego sales of 300 medals to its regular customers
(i.e., the special order cannot be partially fulfilled). How does this information affect your
answer to part (b)? That is, by how much will Award Plus’ profit increase or decrease if it
accepts the special order when plant capacity is only 9,000 medals?  

Answer 1

Solution a:

fixed manufacturing cost for award plus = 7500*46 = $345,000

Fixed Marketing and administrative cost = 7500*34 = $255,000

Total fixed cost = $345,000 + $255,000 = $600,000

As award plus is having manufacturing capacity of 10000 medals, therefore it can accept special order of 1800 medals without affecting sales of regular order quantity and no additional fixed cost will be incurred for the special order.

Therefore contribution from special order will be the increase in Award plus profit if it accept the specila order.

Computation of contribution from Special Order
Particulars	Amount
Selling price per medal for special order	$100.00
Variable cost per unit:
Direct material	$50.00
Direct Labor	$40.00
Contribution per unit for special order	$10.00
Nos of units sold under special order	$1,800.00
Contribution from Special order	$18,000.00

Solution b:

If Award plus plant is having capacity of 9000 medals only then it will forego regular sale of 300 medals then increease in profit will be = contribution from special order - Contribution lost for regular sale foregone

Computation of Contribution lost from Sales Forgone
Particulars	Amount
Selling price per medal for Regular order	$175.00
Variable cost per unit:
Direct material	$50.00
Direct Labor	$40.00
Contribution per unit for special order	$85.00
Nos of units lost of regular sale	$300.00
Contribution lost from sales foregone	$25,500.00

Increase in profit on accepting special order = $18,000 - $25,500 = ($7,500)