(a) Martin Company incurred the following costs for 70,000 units of produced and sold: Variable costs...

(a)
Martin Company incurred the following costs for 70,000 units of produced and sold:
Variable costs $420,000
Fixed costs 392,000

Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity (at the current fixed costs of $392,000) to fill the order without jeopardizing regular sales of 70,000 units. Filling the order will require spending an additional $6,300 for shipping.

If Martin wants to break even on the special order from the foreign company, what should the unit sales price be?

(b)
If Martin wants to earn $6,000 on the order, what should the unit price be? Explain how you arrive at the answer?

(c)
If Martin Company anticipates that regular sales will be affected by the acceptance of a special order. Should the company accept or reject the special order and explain with reference to each option? The number of words should not exceed 100 words and include a word count.

Solutions

Expert Solution

(a) Variable cost per unit = 420000 / 70000

= $ 6 p.u.

Additional shipping cost = $ 6300

Sale price to be charged for special order (break even) = [(3000 * 6) + 6300]/3000

= $ 8.10 p.u.

Note: Fixed cost is irrelevant because it will not change with increase in production of 30000 units.

(b)

Variable cost per unit = 420000 / 70000

= $ 6 p.u.

Additional shipping cost = $ 6300

Profit to be earned = $ 6000

Sale price to be charged for special order (for profit of $ 6000) = [(3000 * 6) + 6300 + 6000]/3000

= $ 10.10 p.u.

Explanation : To arrive at sale price, we need to include the total variable cost of special order (i.e.,$ 18000), additional shipping cost (i.e., $ 6300), profit to be earned (i.e., $ 6000). After totalling all the above three things, divide them by number of units (i.e., 3000 units). After this you will get the sale price per unit of 3000 units.

(c) If Martin Company anticipates that regular sales will be affected by the acceptance of a special order, there could be two options available :

i. If complete 70000 units are to be accepted or rejected because of special order, then reject the special orders as it's profit will be far less than 70000 units sold.

ii. If there is choice that 70000 units can be partially accepted than company needs to see that if 3000 units of special order can give more profits then 3000 units sold ordinarily, then company should accept the offer. Otherwise special order should be rejected.

[word count : 99]

Feedback would be appreciated.

ekkarill92 answered 2 years ago

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