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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 42,000 one-hundred-pound bags per month, and it currently is selling 40,000 bags manufactured in 40 batches of 1,000 bags each. The firm just received a request for a special order of 9,000 one-hundred-pound bags of fertilizer for $290,000 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 $5,500 cost for GGI. The special order would be processed in two batches of 4,500 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:

Sales and production cost data for 40,000 bags, per bag:
Sales price	$	47
Variable manufacturing costs		21
Variable selling costs		3
Fixed manufacturing costs		17
Fixed marketing costs		4

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 9,000 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.

Answer 1

1. Calculation of the total relevant cost of filling this special sales order:

2. Calculation of change in operating income if the special order is accepted:

= Selling price - Special order relevant cost

= $125000 - $147500

= -$74500 = Loss from special order

3.Calculation of break-even selling price per unit for the special sales order:

Break-even selling price per unit = Total relevant cost/No. of Bags

= $ 355500 / 9000 = $39.50

4. 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.

Comparative Income statement
			Units	Total costs	Per unit		Units	Total costs	Per unit
	Sales		9000	290000	32.22		9000	194500	21.61
	Variable costs
	Variable Manufacturing costs			189000	21			189000	21
	Variable selling costs			0				0
	Total Variable costs			189000				189000
	Contribution margin			101000				5500
	Fixed costs
	Fixed manufacturing costs
	One time packaging & distribution costs			5500				5500
	Fixed marketing costs
	Total fixed costs			5500				5500
	Operating Income			95500				0