Question

The Award Plus Company manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 6,000 medals each month. Current production and sales are 5,000 medals per month. The company normally charges $200 per medal. Cost information for the current activity level is as​ follows:
Variable costs that vary with number of units produced
Direct materials -------------------- $150,000
Direct manufacturing labor---------75,000
Variable costs (for setups, materials handling, quality control, etc.) that vary with number of batches, 200 batches x $1,000 per batch ---------- 200,000
Fixed manufacturing costs --------------- 200,000
Fixed marketing costs-------------------- 25,000
Total costs --------------------------------$650,000
Award Plus has just received a special​ one-time-only special order for 1,000 medals at $175 per medal. Accepting the special order would not affect the​ company's regular business. Award PlusAward Plus makes medals for its existing customers in batch sizes of 25 medals ​(200 batches x 25 medals per batch​ = 5,000 ​medals). The special order requires Award Plus to make the medals in 10 batches of 100 each.
1a. Should Award Plus accept this special​ order? Show your calculations. Begin by completing an​ analysis, and start by showing the computation of the​ company's operating income without the special order.​ Next, calculate operating income with the special​ order, and then calculate the differences between the two columns.

	With One-Time Only Special Order Under Reduced Plant Capacity 5,500 Units
Revenues	----
Variable Cost
Direct Material	-----
Direct manufacturing labor	------
Batch manufacutring cost	-----
Fixed Cost
Fixed manufacturing cost	------
Fixed marketing cost	-----
Total cost	------
Operating Income	------

Suppose plant capacity were only 5,500 medals instead of 6,000 medals each month. Award Plus must (accept or reject) the special order in full. Should
Award Plus accept the special​ order? Show your calculations. Complete the analysis below to determine if Award Plus should accept the special order under this scenario.

Based on the calculations under this​ scenario, Award Plus should the​ one-time-only special order under the reduced capacity because accepting the order operating income by ​$---.

Answer 1

Solution 1a:

Differential Analysis - Award Plus Company - Reject Special Order (alt 1) or Accept Special Order (Alt2) - No capacity constraints
Particulars	Reject Special Order (Alt1)		Accept Special Order (Alt2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	5000*$200	$1,000,000.00	[(5000*$200) + (1000*$175)]	$1,175,000.00	$175,000.00
Costs:
Direct Material	5000*$30	$150,000.00	6000*$30	$180,000.00	$30,000.00
Direct Labor	5000*$15	$75,000.00	6000*$15	$90,000.00	$15,000.00
Variable cost vary with batches	200*1000	$200,000.00	210*$1000	$210,000.00	$10,000.00
Fixed manufacturing cost		$200,000.00		$200,000.00	$0.00
Fixed marketing cost		$25,000.00		$25,000.00	$0.00
Income / (Loss)		$350,000.00		$470,000.00	$120,000.00

As net income will increase by $120,000 on accepting special order therefore special order must be accepted.

Solution 1b:

Differential Analysis - Award Plus Company - Reject Special Order (alt 1) or Accept Special Order (Alt2) - Capacity constraint to 5500 medals
Particulars	Reject Special Order (Alt1)		Accept Special Order (Alt2)		Differential effect on income (Alt 2)
	Details	Amount	Details	Amount
Revenue	5000*$200	$1,000,000.00	[(4500*$200) + (1000*$175)]	$1,075,000.00	$75,000.00
Costs:
Direct Material	5000*$30	$150,000.00	5500*$30	$165,000.00	$15,000.00
Direct Labor	5000*$15	$75,000.00	5500*$15	$82,500.00	$7,500.00
Variable cost vary with batches	200*1000	$200,000.00	[(4500/25) + (1000/100)]*1000	$190,000.00	-$10,000.00
Fixed manufacturing cost		$200,000.00		$200,000.00	$0.00
Fixed marketing cost		$25,000.00		$25,000.00	$0.00
Income / (Loss)		$350,000.00		$412,500.00	$62,500.00

Award plus should accept the special order under reduced capacity because accepting the order will increase operating income by $62,500.