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 33,000 one-hundred-pound bags per month, and it currently is selling 31,000 bags manufactured in 31 batches of 1,000 bags each. The firm just received a request for a special order of 7,200 one-hundred-pound bags of fertilizer for $200,000 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 $4,400 cost for GGI. The special order would be processed in two batches of 3,600 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 31,000 bags, per bag:

Sales price $ 46

Variable manufacturing costs 12

Variable selling costs 3

Fixed manufacturing costs 21

Fixed marketing costs 7

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 7,200 bags.

Required: 1. What is the total relevant cost of filling this special sales order?

2. What would be the change in operating income if the special order is accepted?

3. What is the break-even selling price per unit for the special sales order (i.e., what is the selling price that would result in a zero effect on operating income)?

4. Prepare comparative income statements, using the contribution format, for both the current situation and assuming the special order is accepted at the break-even price determined in requirement 3.

Answer 1

Solution 1:
Operating capacity	33000
Less: Current sales	31000
Spare capcity	2000
Special order units	7200
Reduction in current sales units	5200
Existing contribution margin	Per Unit
Sales price	46
Less: variable manufacturing cost	12
Less: Variable sellinh cost	3
Current contribution margin per unit	31
Computaion of Total relevant cost for special order
Variable Manufacturing costs for special order units	86400
One time delivery and packaging cost	4400
Opportunity cost (Contribution margin lost 5200*$31)	161200
Total relevant cost of filling special sales order	252000

Solution 2:
Selling price of special order	200000
Less: Total relevant cost of filling special sales order	252000
Change in Operating Income	-52000
Solution 3:
Total relevant cost of filling special sales order	252000
/ Special order sales units	7200
Breakeven selling price per unit	35.00

Solution 5:

If GGI wants its own exacting standards about its quality and wants to maintain the brand name, it should not pass on the order to another competing firm whose quality though known to be good but not sure of.