Question

Special-Order Decision, Qualitative Aspects

Randy Stone, manager of Specialty Paper Products Company, was agonizing over an offer for an order requesting 5,000 boxes of calendars. Specialty Paper Products was operating at 70% of its capacity and could use the extra business. Unfortunately, the order's offering price of $4.20 per box was below the cost to produce the calendars. The controller, Louis Barns, was opposed to taking a loss on the deal. However, the personnel manager, Yatika Blaine, argued in favor of accepting the order even though a loss would be incurred. It would avoid the problem of layoffs and would help to maintain the company's community image. The full cost to produce a box of calendars follows:

Direct materials	$1.15
Direct labor	2.00
Variable overhead	1.10
Fixed overhead	1.00
Total	$5.25

Later that day, Louis and Yatika met over coffee. Louis sympathized with Yatika's concerns and suggested that the two of them rethink the special-order decision. He offered to determine relevant costs if Yatika would list the activities that would be affected by a layoff. Yatika eagerly agreed and came up with the following activities: an increase in the state unemployment insurance rate from 1% to 2% of total payroll, notification costs to lay off approximately 20 employees, and increased costs of rehiring and retraining workers when the downturn was over. Louis determined that these activities would cost the following amounts:

• Total payroll is $1,460,000 per year.
• Layoff paperwork is $25 per laid-off employee.
• Rehiring and retraining is $150 per new employee.

Required:

Enter all amounts as positive numbers.

1. Conceptual Connection: Assume that the company will accept the order only if it increases total profits (without taking the potential layoffs into consideration). Should the company accept or reject the order?
Reject

Provide supporting computations. If required, round your answers to the nearest cent.

Incremental revenue per box	$
Incremental cost per box	$
Loss per box	$
Total loss	$

2. Conceptual Connection: Consider the new information on activity costs associated with the layoff. Should the company accept or reject the order?
Accept

Provide supporting computations.

Increase state unemployment insurance premiums	$
Notification costs	$
Rehiring and retraining costs	$
Total	$

Answer 1

Question 1
Incremental revenue per box	$            4.20	As the offer price is $4.2
Incremental cost per box	$            4.25	WN-1
Loss per box	$           -0.05
Total loss	$        -250.00	For 5,000 boxes
WN-1
Incremental cost per box
We shall only consider the variable costs
As for the fixed cost, it is only an allocation of fixed costs towards this project
Total variable cost per box
Direct material	$            1.15
Direct labout	$            2.00
Variable overhead	$            1.10
Total variable cost per box	$            4.25
Question 2
Increase state unemployment insurance premiums	$         14,600	WN-1
Notification costs	$             500	$25 per employee for 20 employees
Rehiring and retraining costs	$          3,000	$150 per employee for 20 employees
Total	$         18,100
The comparative increase in cost os $ 18,100 to save a loss of $250
The company should accept the order
WN-1
Increase in state unemployment insurance premium by 1%
Total payroll cost	$    14,60,000
1% of the cost	$         14,600