Question

Winona Johnson is the president of Johnson Mfg., which manufactures coats. She is trying to decide whether to make 3,000 Type III coats or purchase them from a subcontractor to fill a rush special order that she just received. There are no marketing costs on the special order. Acceptance of the special order would not necessitate any premium pay for overtime work or additional fixed costs. Johnson Mfg. has supplied the following data:

Cost Data for type III Coats

Sales Price                              $42

Direct Materials                      15

Direct Labor                            9

Fixed Mfg Overhead              3

Variable mfg Overhead           6

Variable Marketing Costs        3

Fixed Marketing Costs           1

Fixed Admin Overhead          2       

C Discuss the options Ms. Johnson is facing, incorporating the information from parts A and B.

Here are A and B for background

A What are the potential strategic issues related to this decision?

B In addition to the cost information presented in the case, what other data would benefit Ms. Johnson as she makes her decision?

Answer 1

In fulfillment of special order, there are

• No marketing costs
• No overtime to be paid
• No additional fixed overhead are incurred

So the statement showing benefit to be achieved in fulfillment of special order is as below:

Particulars	Amount ($)
Selling price	42
Less: costs
Direct material	15
Direct labour	9
Variable manufacturing overhead	6
Contribution per unit	12

Since manufacturing such order will lead to contribution of $12*3000=$36000 so Johnson manufacturing should manufacture the order instead of subcontracting it.

And apart from cost, making decision of either to manufacture or subcontract it should also consider other Non-economic factors LIke quality of the product, willingness of workers to work without loss in productivity, support from management.

Most important is to ensure that company's regular order dont get affected by fulfillment of such special order.

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