Question

Ironwood Company manufactures a variety of sunglasses. Production information for its most popular line, the Clear Vista (CV), follows:    

	Per Unit
Sales price	$	51.50
Direct materials		20.00
Direct labor		10.00
Variable manufacturing overhead		6.00
Fixed manufacturing overhead		5.00
Total manufacturing cost	$	41.00

Suppose that Ironwood has been approached about producing a special order for 2,800 units of custom CV sunglasses for a new semiprofessional volleyball league. All units in the special order would be produced in the league’s signature colors with a specially designed logo emblem attached to the side of the glasses. The league has offered to pay $49.00 per unit in the special order. Additional costs for the special order total $3.00 per unit for mixing the special frame color and purchasing the emblem with the league’s logo that will be attached to the glasses.  

Required:
1. Assume Ironwood has the idle capacity necessary to accommodate the special order. Calculate the additional contribution margin Ironwood would make by accepting the special order.



2-a. Calculate the current contribution margin per unit. (Round your answer to 2 decimal places.)



2-b. Suppose Ironwood is currently operating its production facility at full capacity and accepting the special order would mean reducing production of its regular CV model. Should Ironwood accept the special order in this case?

	Yes
	No

     

3. Calculate the special order price per unit at which Ironwood is indifferent between accepting or rejecting the special order. (Round your answer to 2 decimal places.)

Answer 1

Requirement 1 :
Special order price		$         49.00
Less Variable cost per unit;
Direct material	$ 20.00
Direct labour	$ 10.00
Variable manufacturing overhead	$    6.00
Additional variable cost on special order	$    3.00	$        (39.00)
Contribution margin per unit		$         10.00
No. Of units		2800.00
Contribution margin of special order		$ 28,000.00
Requirement 2(a) :
Current contribution margin;
Sales-variable cost
Sales Price		$         51.50
Less Variable cost per unit;
Direct material	$ 20.00
Direct labour	$ 10.00
Variable manufacturing overhead	$    6.00
		$        (36.00)
Contribution Margin		$        15.50
Requirement 2(B) :
No.
Because the contribution margin of regular cv model(15.50) is greater than special order contribution margin(10)
Requirement 3 :
Lost contribution margin =	$ 15.50
Add variable cost on special order	$ 39.00
	$ 54.50
the special order price per unit at which Ironwood is indifferent between accepting or rejecting the special order is $54.50