Question

Zachary Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,500 units. Zachary made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.

Materials cost ($26 per unit × 20,000)	$	520,000
Labor cost ($22 per unit × 20,000)		440,000
Manufacturing supplies ($3 × 20,000)		60,000
Batch-level costs (20 batches at $3,000 per batch)		60,000
Product-level costs		320,000
Facility-level costs		390,000
Total costs	$	1,790,000
Cost per unit = $1,790,000 ÷ 20,000 = $89.5

Required

1. Sunny Motels has offered to buy a batch of 500 blankets for $52 each. Zachary’s normal selling price is $91 per unit. Calculate the relevant cost per unit for the special order. Based on the preceding quantitative data, should Zachary accept the special order?

2. Sunny offered to buy a batch of 1,500 blankets for $54 per unit, calculate the relevant cost per unit for the special order. Should Zachary accept the special order?

(For all requirements, round "Cost per unit" to 2 decimal places.)

Answer 1

1) The relevant cost for special order will include unit level cost (i.e. Direct materials, Direct Labor and manufacturing suppies). It also include batch level cost because company only produces in batches. The relevant batch level cost is $3,000 for one batch. Even though only 500 units are produced from the usual 1,500 units batch, the 500 units cannot be produced without incurring the full batch level costs.

The product and facility level costs are not relevant to this special order because the product would still have been manufactured as part of normal sales, and the business would still exist regardless of whether the special order is taken.

Calculation of relevant Cost for Special Order (Amount in $)

Materials Cost (500 units*$26)	13,000
Labor Cost (500 units*$22)	11,000
Manufacturing Supplies (500 units*$3)	1,500
Batch level cost	3,000
Total Relevant cost (A)	28,500
Total Units (B)	500
Cost per unit (A/B)	57

As the cost per unit of $57 is more than the price per unit of $52, Zachary should not accept the special order.

2) Calculation of relevant Cost for Special Order (Amount in $)

Materials Cost (1,500 units*$26)	39,000
Labor Cost (1,500 units*$22)	33,000
Manufacturing Supplies (1,500 units*$3)	4,500
Batch level cost	3,000
Total Relevant cost (A)	79,500
Total Units (B)	1,500
Cost per unit (A/B)	53

As the cost per unit of $53 is less than the price per unit of $54, Zachary should accept the special order.