Question

In: Accounting

Trophies R Us manufactures medals for winners of athletic events and other contests. Its manufacturing plant...

Trophies R Us manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 10,000 medals each month; current monthly production is 7,500 medals. The company normally charges $225 per medal. Variable costs and fixed costs for the current activity level of 75% follow:

Current product costs

Variable costs

Manufacturing

   Labor

$375,000

   Materials

300,000

Marketing

187,500

Total variable costs

862,500

Fixed costs

    Manufacturing

275,000

    Marketing

225,000

Total fixed costs

500,000

Total costs

1,362,500

Trophies R Us has just received a special one-time order for 2,500 medals at $115 per medal. For this particular order, no variable marketing costs will be incurred. As a management accountant with Trophies R Us, you have been assigned the task of analyzing this order and recommending whether the company should accept or reject it..

1) Calculate both the old (i.e., prior to the special order) average cost per unit and the recalculated average cost per unit, including the effect of the special sales order. Are either of these two figures relevant for evaluating whether to accept or reject the special order? Explain.

2) Based on a short-term financial analysis, determine if Trophies R Us Co. should accept the special order and why.

3) What is the breakeven selling price per unit for the special sales order?

4) Discuss at least three other considerations that you should include in your analysis of the special order.

Solutions

Expert Solution

(1)

7500 units 10000 units
Total Cost Per Unit Cost Total Cost Per Unit Cost
1 Variable costs
a Manufacturing
-    Labor 375000 50.00 500000 50.00
(375000/7500) (10000 x 50) (500000/10000)
-    Materials 300000 40.00 400000 40.00
(300000/7500) (10000 x 40) (400000/10000)
b Marketing 187500 25.00 187500 18.75
(187500/7500) (7500 x 25) (187500/10000)
Total variable costs 862500 115.00 1087500 108.75
2 Fixed costs
a     Manufacturing 275000 36.67 275000 27.50
b     Marketing 225000 30.00 225000 22.50
Total fixed costs 500000 66.67 500000 50.00
Total costs 1362500 181.67 1587500 158.75
(1362500/7500) (1587500/10000)
Average Cost per Unit (old) 181.67
Average Cost per Unit (new) 158.75
However, for the purposes of accepting the order, neither of the Average costs per unit are relevant
as for the special order, only relevant costs are variable costs pertaining to only units produced under special order.
Production of Special order has nothing to do with costs being incurred on other units.  
However, if there are capacity constraints, then one must be familiar with average costs so as to eveluate loss of
contribution on sacrifice of normal units of production.

(2)

Cost of Production of Special Order (2500 units)
   Labor (2500 x 50) 125000
   Materials (2500 x 40) 100000
Total 225000
Cost per unit of (225000/2500) 90
Special Order
Price per medal $ 115 per medal
Total Revenue (115 * 2500) 287500
Profit on Special Order 62500
Verdict: Accept Special Order

(3) Breakeven Selling Price per unit of Special Order

= Variable Cost for Production of units of Special Order

= $ 90 per medal

(4) Other considerations for accepting the special order propsal are as follows:

i. Profit margin to be earned on the special order and its comparison with what is earned on normal units of production.

ii. Organisation's commitment to whether entertain any kind of Special Orders.

iii. Special Orders are also usually time bound, ehich may also pose difficulty in completing order within time.


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