Question

Read the scenario below, and address the subsequent requirements.

You are analyzing cost data for your boss related to a special order your company is considering from a large customer in Singapore. The following data are applicable to the product being ordered:

• Normal unit sales price: $49.95
• Variable unit manufacturing costs: $10.50
• Variable unit selling and administrative costs: $18.25

The customer is requesting that the sales order be accepted on the following terms:

1. The unit sales price equals the unit contribution margin plus 10%
2. Freight will be paid by the customer
3. Your company will pay a $5,000 "facilitating payment "to a "friend of the customer" to get the product through customs more quickly.

Your boss has told you this is a very important customer. Furthermore, this order will help some employees earn a little extra holiday money with overtime.

Required:

Post your responses to the following questions:

1. What are the accounting and ethical issues involved in this scenario?
2. Would you recommend the sales order be accepted on the sales terms proposed? Why or why not?

Answer 1

Since the freight will be paid by customer assuming there is no selling and administrative costs.

Calculation of Contribution Margin-

Selling price per unit $49.95

Less: Variable manufacturing Cost per unit $10.50

Contribution Margin $39.45

Selling price for the customer =  $39.45 * 1.1 = $43.395

Fixed Costs that will be incurred = $5,000

Therefore, number of units required to be sold for break even

= Fixed Cost / Contribution per unit

= $5,000 / ($43.395 - $10.50)

= $5,000 / 32.895

= 152 units

Answer to relevant questions:

Accounting issue involved = The selling price will be lower but it will have same affect over the variable cost per unit as freight will be paid by the customer. Also a fixed cost of $5,000 will also be incurred.

Ethical issues involved = Payment to customs for getting things clear quickly is not ethical as it amounts to unfair means and these activities shall not be supported.

The sales order on the terms proposed (only financial) can be accepted assuming there will be no selling and administrative costs involved and there will be at least order of 152 units so as to break even the fixed cost being incurred.