Question

Special Order
Total cost data follow for Greenfield Manufacturing Company, which has a normal capacity per period of 20,000 units of product that sell for $54 each. For the foreseeable future, regular sales volume should continue to equal normal capacity.

Direct material				$268,800
Direct labor				202,000
Variable manufacturing overhead				154,000
Fixed manufacturing overhead (Note 1)				118,800
Selling expense (Note 2)				129,600
Administrative expense (fixed)				50,000
				$923,200

Notes:
1. Beyond normal capacity, fixed overhead costs increase $4,500 for each 1,000 units or fraction thereof until a maximum capacity of 24,000 units is reached.
2. Selling expenses consist of a 10% sales commission and shipping costs of $1 per unit. Greenfield pays only one-half of the regular sales commission rates on sales amounting to $3,000 or more.

Greenfield's sales manager has received a special order for 2,500 units from a large discount chain at a price of $44 each, F.O.B. factory. The controller's office has furnished the following additional cost data related to the special order:

1. Changes in the product's design will reduce direct material costs by $4 per unit.
2. Special processing will add 10% to the per-unit direct labor costs.
3. Variable overhead will continue at the same proportion of direct labor costs.
4. Other costs should not be affected.

a. Present an analysis supporting a decision to accept or reject the special order. (Round computations to the nearest cent.)

Differential Analysis
	Per Unit	Total
Differential revenue		Answer
Differential costs
Direct material	Answer
Direct labor	Answer
Variable manufacturing overhead	Answer
Selling:
Commission	Answer
Shipping (F.O.B. factory terms)	Answer
Total variable cost	Answer	Answer
Contribution margin from special order		Answer
Fixed cost increment:
Extra cost		Answer
Profit on special order		Answer

b. What is the lowest price Greenfield could receive and still make a profit of $5,000 before income taxes on the special order?

Round answer to two decimal places, if applicable.

$Answer

Answer 1

Greenfield Manufacturing Company
Given data for 20,000 units normal capacity
Particulars	$ Per unit	$ Total
Sales	54	10,80,000
Less : Variable costs
Direct material	13.44	2,68,800
Direct labour	10.1	2,02,000
Variable manufacturing overheads	7.7	1,54,000
Sales commission (10% of sales)	5.4	1,08,000
Shipping costs	1	20,000
Contribution	16.36	3,27,200
Less : Fixed costs
Fixed manufacturing overheads		1,18,800
Administrative expenses		50,000
Fixed selling expenses		1,600
Profit		1,56,800
Part a.
Analysis of special order of 2500 units
Particulars	$ Per unit	$ Total
Differential revenue (2500*$44)	44	1,10,000
Less : Differential costs
Direct material	9.44
Direct labour	11.11
Variable manufacturing overheads	8.47
Sales commission	4.4
Shipping costs	1
Total variable costs	34.42	86,050
Contribution margin		23,950
Less : Fixed costs increment
$4500*3		13,500
Profit on special order		10,450
Conclusion :-
The special order should be accepted as it is generating
a profit of $10,450
Part b.
Calculation of lowest price to be quoted to make a
profit of $5000 on the special order
Particulars	$ Per unit	$ Total
Profit required on the order		5,000
Add : Fixed costs increment		13,500
Contribution required	7.4	18,500
Add : variable costs	34.42
Selling price per unit	41.82
Hence a lowest price of $41.82 can be quoted to earn a
profit of $5000 on the special order