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.

	Without One-Time OnlySpecial Order 5,000 Units	With One-Time OnlySpecial Order 6,000 Units	Difference 1,000 Units
Revenues	----	-----	---
Variable Cost			----
Direct Material	-----	------	-----
Direct manufacturing labor	------	------	------
Batch manufacutring cost	-----	-------	-----
Fixed Cost			----
Fixed manufacturing cost	------	------	-----
Fixed marketing cost	-----	------	-----
Total cost	------	------	------
Operating Income	------	-------	-------

1a. Based on above calculations, Award Plus should ---- (Accept or Reject) the​ one-time-only special order if it has no​ long-term implications because accepting the order ---(decreases or Increases) operating income by ​$----

Assume that monthly capacity is 6,000 medals. Award Plus is concerned that if it accepts the special​ order, its existing customers will immediately demand a price discount of $10 in the month in which the special order is being filled. Existing customers would argue that Award Plus​'s capacity costs are now being spread over more units and that they should get the benefit of these lower costs. Should Award Plus accept the special order under these​ conditions? Show your formula and calculations.

1b) Net Increase or decrease in OI from accepting SO = ----  
1c) Award Plus should accept OR not accept the​ one-time-only special order under this scenario because accepting the order decreases OR increases operating income.

Answer 1

1a.

	Without One-Time Only Special Order 5000 Units	With One-Time Only Special Order 6000 Units	Difference 1000 Units
Revenues	1000000	1175000	175000
Variable cost
Direct material	150000	180000	30000
Direct manufacturing labor	75000	90000	15000
Batch manufacturing cost	200000	210000	10000
Fixed cost
Fixed manufacturing cost	200000	200000	0
Fixed marketing cost	25000	25000	0
Total cost	650000	705000	55000
Operating income	350000	470000	120000

Award Plus should accept the on-time only special order if it has no long-term implications because accepting the order increases operating income by $120000.

1b. Net increase or decrease in OI from accepting SO = $70000

	Without One-Time Only Special Order 5000 Units	With One-Time Only Special Order 6000 Units	Difference 1000 Units
Revenues	1000000	1125000	125000
Variable cost
Direct material	150000	180000	30000
Direct manufacturing labor	75000	90000	15000
Batch manufacturing cost	200000	210000	10000
Fixed cost
Fixed manufacturing cost	200000	200000	0
Fixed marketing cost	25000	25000	0
Total cost	650000	705000	55000
Operating income	350000	420000	70000

1c. Award Plus should accept the one-time only special order under this scenario because accepting the order increases operating income.