Question

Ironwood Company manufactures a variety of sunglasses. Production information for its most popular line, the Clear Vista (CV), follows:

	Per Unit
Sales price	$	50.50
Direct materials		19.00
Direct labor		10.00
Variable manufacturing overhead		5.00
Fixed manufacturing overhead		5.00
Total manufacturing cost	$	39.00

Suppose that Ironwood has been approached about producing a special order for 2,700 units of custom CV sunglasses for a new semiprofessional volleyball league. All units in the special order would be produced in the league’s signature colors with a specially designed logo emblem attached to the side of the glasses. The league has offered to pay $47.00 per unit in the special order. Additional costs for the special order total $3.00 per unit for mixing the special frame color and purchasing the emblem with the league’s logo that will be attached to the glasses.

Required:
1. Assume Ironwood has the idle capacity necessary to accommodate the special order. Calculate the additional contribution margin Ironwood would make by accepting the special order.

2-a. Calculate the current contribution margin per unit.

2-b. Suppose Ironwood is currently operating its production facility at full capacity and accepting the special order would mean reducing production of its regular CV model. Should Ironwood accept the special order in this case?

3. Calculate the special order price per unit at which Ironwood is indifferent between accepting or rejecting the special order.

I don't really know why I am getting the wrong answer. I am completely lost. If there could be an explanation to how you found your answer that would be awesome.

Answer 1

Requirement 1
Calculation of additional Contribution margin
Incremental Revenue (2,700 * $47)		$126,900
Less: Variable cost
Direct material (2,700 * $19)	$51,300
Direct labor (2,700 * $10)	$27,000
Variable manufacturing Overhead (2,700 * $5)	$13,500
Additional cost (2,700 * $3)	$8,100	$99,900
Additional Contribution margin		$27,000
Requirement 2 - a
Calculation of Current Contribution margin
Sales Price		$50.50
Less: Variable cost
Direct material	$19
Direct labor	$10
Variable manufacturing Overhead	$5	$34.00
Additional Contribution margin		$16.50
Requirement 2 - b
No, because current contribution margin $16.50 is higher than additional contribution margin $10.
Requirement 3
Indefferent price for special order =$19+$10+$5+$3 = $37