The Award Plus Company manufactures medals for winners of athletic events and ot
ID: 2542106 • Letter: T
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
Difference
1,000 Units
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 is6,000 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. ShouldAward 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.
Without
One-Time OnlySpecial Order 5,000 Units
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 ------ ------- -------Explanation / Answer
1a.
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
1c. Award Plus should accept the one-time only special order under this scenario because accepting the order increases operating income.
Without One-Time Only Special Order 5000 Units With One-Time Only Special Order 6000 Units Difference1000 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
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