Question

The

Gold Plus

Company manufactures windows. Its manufacturing plant has the capacity to produce

6,000

windows each month. Current production and sales are

5,000

windows per month. The company normally charges

$200

per window.

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, and so on) that vary with number of batches, 200 batches × $1,000 per batch	200,000
Fixed manufacturing costs	200,000
Fixed marketing costs	25,000
Total costs	$650,000

Gold Plus

has just received a special​ one-time-only order for

1,000

windows at

$175

per window. Accepting the special order would not affect the​ company's regular business or its fixed costs.

Gold Plus

makes windows for its existing customers in batch sizes of

25

windows

​(200

batches​ ×

25

windows per batch​ =

5,000

​windows). The special order requires

Gold Plus

to make the windows in

10

batches of

100

windows.

1.	Should Gold Plus accept this special​ order? Show your calculations.
2.	Suppose plant capacity were only 5,500 windows instead of 6,000 windows each month. The special order must either be taken in full or be rejected completely. Should Gold Plus accept the special​ order? Show your calculations.
3.	As in requirement​ 1, assume that monthly capacity is 6,000 windows. Gold Plus is concerned that if it accepts the special​ order, its existing customers will immediately demand a price discount of $5 in the month in which the special order is being filled. They would argue that Gold Plus​'s capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Gold Plus accept the special order under these​ conditions? Show your calculations.

Answer 1

Question 1

	Without Accepting	Special Order	After Accepting	Special Order
Particulars	Amount	Amount	Amount	Amount
Sales Revenue		10,00,000		11,75,000
Less : Variable Costs
Direct Materials	150,000		180,000
Direct Labour	75,000		90,000
Variable Manufacturing Cost	200,000		210,000
Total Variable Costs		425,000		480,000
Contribution Margin		575,000		695,000
Fixed Costs
Fixed Manufacturing Costs	200,000		200,000
Fixed Marketing Costs	25,000		25,000
Total Fixed Costs		225,000		225,000
Operating Income		350,000		470,000

Contribution Margin = Sales - Total Variable Costs

Operating Income = Contribution Margin - Total Fixed Costs

Notes

Sales Revenue = 5,000 Units * $ 200 per Unit + 1,000 Units * $ 175 per Unit = 11,75,000

Direct Labour = 6,000 Units * $ 15 Per Unit = $ 90,000

Direct Materials = 6000 Units * $ 30 per Unit = $ 180,000

Variable Manufacturing Costs = 210 Batches * $ 1000 per Batch = $ 210,000

Direct Materials Per Unit = 150,000 / 5,000 Units = $ 30 per Unit

Direct Labour Per Unit = 75,000 / 5,000 Units = $ 15 per Units

Question 2

Operating Income without Accepting Special Order will remain same = $ 350,000

Calculation of Operating Income after Accepting Special Order

Operating Income = Sales Revenue - Total Variable Costs - Total Fixed Costs

Operating Income = 10,75,000 - 437,500 - 225,000

Operating Income = $ 412,500

Increase in Operating Income from Special order = 412500 - 350,000

Increase in Operating Income = $ 62,500

The Company should accept the Special Order as it is the Operating Income

Total Fixed Costs will remain same

Total Variable Costs

Direct Materials = 5,500 Units * $ 30 = $ 165,000

Direct Labour = 5,500 Units * $ 15 Per Unit = $ 82,500

Variable Manufacturing Costs = 190 Batches * $ 1000 per Batch = $ 190,000

Total Batches = 180 Batches for 4500 Units + 10 Batches for Special Order

Sales Revenue = 4,500 Units * 200 per Unit + 1,000 Units * $ 175 = $ 10,75,000

Question 3

Operating Income without Accepting Special Order will remain same = $ 350,000

Calculation of Operating Income after Accepting Special Order

Operating Income = Sales Revenue - Total Variable Costs - Total Fixed Costs

Operating Income = 11,50,000 - 480,000 - 225,000

Operating Income = $ 445,000

Increase in Operating Income from Special order = 445000 - 350,000

Increase in Operating Income = $ 95,000

The Company should accept the Special Order as it is the Operating Income

Total Fixed Costs will remain same

Total Variable Costs

Direct Materials = 6,000 Units * $ 30 = $ 180,000

Direct Labour = 6,000 Units * $ 15 Per Unit = $ 90,000

Variable Manufacturing Costs = 210 Batches * $ 1000 per Batch = $ 210,000

Total Variable Costs = 180,000 + 90,000 + 210,000 = $ 480,000

Sales = 5,000 Units * $ 195 per Unit + 1,000 Units * $ 175 per Unit = $ 11,50,000

Format used in Part 1 is applicable for all and other Calculation has been done for the other parts.

In all cases Income without Accepting Special Order will remain same.