Question

Juett Company produces a single product. The cost of producing and selling a si product at the company's normal activity level of 70,000 units per month is as

producing and selling a single unit of this

Direct materials …………………………………………………………….. $29.60

Direct labor…………………………………………………………………… $5.80

Variable manufacturing overhead………………………………….. $2.50

Fixed manufacturing overhead………………………………………. $17.20

Variable selling & administrative expense……………………… $1.80

Fixed selling & administrative expense………………………….. $6.70

The normal selling price of the product is $72.90 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company.

Required: (SHOW YOUR WORK OR NO POINTS WILL BE ALLOWED)

1-Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

2-Refer back to the original data Suppose that duett Company is already operating at full capacity when the special order is received from the overseas customer. What would be the opportunity cost on each unit delivered to the overseas customer instead of selling it to the normal regular customers?

3-Refer back to the original data. Suppose that Juett Company does not have enough idle capacity to produce all of the units for the overseas customer, and accepting the special order would require shifting 1,400 units from the normal regular customers to the overseas customer. What would be the minimum acceptable price per unit on the special order?

4-Discuss briefiu two of the qualitative factors Juett Company should consider in making the decision to accept or reject the special order from the overseas customer.

Answer 1

1.

Direct materials ……………………………………………………………..     $29.60

Direct labor……………………………………………………………………   $5.80

Variable manufacturing overhead…………………………………..              $2.50

Variable selling & administrative expense………………………                 $1.80

Variable cost poer unit on normal sales                                                    $39.70

- Reduction in salling and administrative expense                                  -$1.10

Variable cost per unit on special order                                                     $38.60

Selling price for special order                                                                   $66.10

Variable cost per unit on special order                                                     $38.60

Contribution margin per unit                                                                     $27.50

No. of units in special order                                                                      2,000

Increase in operatig income                                                                      $55,000

2.

Opportunity cost is the contribution margin on normal sales calculated below:

Normal selling price per unit                                                                      $72.90

Variable cost poer unit on normal sales                                                    $39.70

Contribution margin per unit                                                                      $33.20

3.

Contribution margin per unit                                                                      $33.20

Normal sales displaced                                                                             1,400

Lost contribution margin                                                                           $46,480

Total variable cost on special order   (2000*38.60)                                  $77,200                      

Total Incremental cost of special order                                                    $123,680

No. of units on special order                                                                     2,000

Minimum acceptable price in special order                                              $60.18

4.

Juett Company should accept the order because:

If there is additional capacity, there will be an increase in Net operating income by $55,000

Even if there is no additional capacity, the minimum acceptable price on special order comes out to be $60.18 and the company has set the discounted price to be $66.10 which is higher and hence will generate profits.