Question

special order activity-based costing. The reward One Company manufactures windows. Its maufacturing plant has the capacity o produce 12,000 windows each month. current production and sales are 10,000 windows per month. The compan normally charges $250 per window. Cost information forthe current activity level is as follows:

Variable costs that vary with # of units produced

Direct materials                                                                                                 600,000

Direct manufacturing labor                                                                                700,000

Variable costs (for setups, materials handling, quality control, and so on)        150,000

that vary with # of batches , 100 batches * x $1500 per batch

Fixed manufacturing costs                                                                                250,000

Fixed marketing costs                                                                                      400,000

Total Costs                                                                                                    $2,100,000

Reward One just received a special one-time only order of 2,000 windows at $225 per window. Accepting the special order would not affect the company's regular business or its fixed costs. Reward One makes windows for its existing customer in batch sizes of 100 windows (100 batches x 100 windows per batch= 10,000 windows) The special order requires Reward One to make the windows in 25 batches of 80 windows.

1) Should Reward One accept this special order? Show your calculations

2) suppose plant capacity were only 11,000 windows instead of 12,000 windows each month. The special order must either be taken in full or be rejected completely. Should Reward One accept the special order? show your calculations

3)As in requirement, assume that monthly capacity is 12,000 windows. Reward one is concerned that if it accepts the special order, its existing customers will immeiately demand price discount of $20 in the month in which the special order is being filled. They would argue that Reward One's capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Reward One accept the special order under these conditions? show your calculations

Answer 1

Solution 1:

Computation of Increase/ (Decrease) in income on acceptance of special order - Reward one company
Particulars	Amount
Revenue from special order (2000*$225)	$450,000.00
Less: Cost for special order:
Direct materials (2000*$60)	$120,000.00
Direct labor (2000*$70)	$140,000.00
Variable cost (for setups, material handling, quality control etc) (25*$1,500)	$37,500.00
Net Increase (Decrease) in income	$152,500.00

As net income is increased by $152,500, therefore reward one should accept the special order.

Solution 2:

Computation of Increase/ (Decrease) in income on acceptance of special order - Reward one company
Particulars	Amount
Revenue from special order (2000*$225)	$450,000.00
Less: Decrease in regular sale [1000*$250]	$250,000.00
Less: Cost for special order:
Direct materials (1000*$60)	$60,000.00
Direct labor (1000*$70)	$70,000.00
Variable cost (for setups, material handling, quality control etc) (25*$1,500 - 10*1500)	$22,500.00
Net Increase (Decrease) in income	$47,500.00

As net income is increased by $47,500, therefore reward one should accept the special order.

Solution 3:

Computation of Increase/ (Decrease) in income on acceptance of special order - Reward one company
Particulars	Amount
Revenue from special order (2000*$225)	$450,000.00
Less: Decrease in revenue from regular sale (10000*$20)	$200,000.00
Less: Cost for special order:
Direct materials (2000*$60)	$120,000.00
Direct labor (2000*$70)	$140,000.00
Variable cost (for setups, material handling, quality control etc) (25*$1,500)	$37,500.00
Net Increase (Decrease) in income	-$47,500.00

As net income is decreased by $47,500, therefore reward one should not accept the special order.