Question

Green Grow Inc. (GGI) manufactures lawn fertilizer. Because of the product’s very high quality, GGI often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI’s operating capacity is 41,000 one-hundred-pound bags per month, and it currently is selling 39,000 bags manufactured in 39 batches of 1,000 bags each. The firm just received a request for a special order of 8,800 one-hundred-pound bags of fertilizer for $260,000 from APAC, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a one-time $6,000 cost for GGI. The special order would be processed in two batches of 4,400 bags each. (No incremental batch-level costs are anticipated. Most of the batch-level costs in this case are short-term fixed costs, such as salaries and depreciation.) The following information is provided about GGI’s current operations:

ales and production cost data for 39,000 bags, per bag:
Sales price	$	46
Variable manufacturing costs		19
Variable selling costs		2
Fixed manufacturing costs		20
Fixed marketing costs		3

No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 8,800 bags.

Required:

1. What is the total relevant cost of filling this special sales order?

2. What would be the change in operating income if the special order is accepted?

3. What is the break-even selling price per unit for the special sales order (i.e., what is the selling price that would result in a zero effect on operating income)?

4. Prepare comparative income statements, using the contribution format, for both the current situation and assuming the special order is accepted at the break-even price determined in requirement 3.

Please give the right answer, it is important!

Answer 1

ANSWER 1 : TOTAL RELEVANT COST OF SPECIAL ORDER:

Variable Manufacturing cost ( 19 * 8800 ) = 1,67,200

Add : Cost of Delivery, Packaging and Distribution service = 6,000

Total Relevant Cost = $ 1,73,200

ANSWER 2 : CHANGE IN OPERATING INCOME:

Amount to be received from special order = 2,60,000

Less : Relevant cost of special order = 1,73,200

Change in operating income = $ 86,800 (Increase in operating income)

ANSWER 3 : BREAK EVEN SELLING PRICE PER UNIT FOR SPECIAL ORDER :

Break even selling price = 1,73,200/8,800

= $ 19.68 per unit

ANSWER 4 : INCOME STATEMENT:

  CURRENT SITUATION IF SPECIAL ORDER IS ACCEPTED

Sales (46*39000) = 17,94,000 (46*39000) + (19.68*8800) = 19,67,200

Less : Variable Manufacturing cost (19*39000) = 7,41,000 (19*47,800) = 9,08,200

Less : Variable Selling Cost (2*39000) = 78,000 (2*39000) = 78,000

Contribution = 9,75,000 = 9,81,000

Less : Fixed Manufacturing Cost (20*39000) = 7,80,000 (20*39000) = 7,80,000

Less : Fixed Marketing Cost (3*39000) = 1,17,000 (3*39000) = 1,17,000

Total Income = $ 78,000 = $ 84,000