Zachary Quilting Company makes blankets that it markets through a variety of dep
ID: 2542302 • Letter: Z
Question
Zachary Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,500 units. Zachary made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.
Required
Sunny Motels has offered to buy a batch of 500 blankets for $52 each. Zachary’s normal selling price is $91 per unit. Calculate the relevant cost per unit for the special order. Based on the preceding quantitative data, should Zachary accept the special order?
Sunny offered to buy a batch of 1,500 blankets for $54 per unit, calculate the relevant cost per unit for the special order. Should Zachary accept the special order?
(For all requirements, round "Cost per unit" to 2 decimal places.)
Materials cost ($26 per unit × 20,000) $ 520,000 Labor cost ($22 per unit × 20,000) 440,000 Manufacturing supplies ($3 × 20,000) 60,000 Batch-level costs (20 batches at $3,000 per batch) 60,000 Product-level costs 320,000 Facility-level costs 390,000 Total costs $ 1,790,000 Cost per unit = $1,790,000 ÷ 20,000 = $89.5
Explanation / Answer
1) The relevant cost for special order will include unit level cost (i.e. Direct materials, Direct Labor and manufacturing suppies). It also include batch level cost because company only produces in batches. The relevant batch level cost is $3,000 for one batch. Even though only 500 units are produced from the usual 1,500 units batch, the 500 units cannot be produced without incurring the full batch level costs.
The product and facility level costs are not relevant to this special order because the product would still have been manufactured as part of normal sales, and the business would still exist regardless of whether the special order is taken.
Calculation of relevant Cost for Special Order (Amount in $)
As the cost per unit of $57 is more than the price per unit of $52, Zachary should not accept the special order.
2) Calculation of relevant Cost for Special Order (Amount in $)
As the cost per unit of $53 is less than the price per unit of $54, Zachary should accept the special order.
Materials Cost (500 units*$26) 13,000 Labor Cost (500 units*$22) 11,000 Manufacturing Supplies (500 units*$3) 1,500 Batch level cost 3,000 Total Relevant cost (A) 28,500 Total Units (B) 500 Cost per unit (A/B) 57Related Questions
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