Can you tell me if I\'m doing this right so far? 11-33 Special Order Green Grow

Question

Can you tell me if I'm doing this right so far?

11-33 Special Order 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 22,000 one- hundred-pound bags per month, and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000 one-hundred-pound bags of fertilizer for $130,000 from APAC, a research organization. The n 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 $2,500 cost for GGI. The special order would be two batches of 2,500 bags each. (No incremental batch- level costs are anticipated.) The following information is processed in d about GGI's current operations: Sales and production cost data for 20,000 bags, per bag $40 17 Sales price Variable manufacturing costs Variable selling costs Fixed manufacturing costs Fixed marketing costs 12 4 No marketing costs would be associated with the special order. Since the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags.

Explanation / Answer

You are not supposed to consider the fixed manufacturing costs while calulating total relvent costs for new order This is because these fixed costs are irrelevent as they are already getting absorbed in current production which is making profit. Requirement 1 The total relevent costs would be For new order of 5000 units Total cost Per unit Variable manufacturing cost 85000 17 One time packing & distribution costs 2500 87500 Requirement 2 Change in Operating Income would be Sales 130000 Less : Relevent costs 87500 Change in operating income 42500 Requirement 3 Special sales price would be Total Relevent costs/Number of units =87500/5000 17.5 Requirement 4 Comparative Income statement Units Total costs Per unit Units Total costs Per unit Sales 5000 130000 26 5000 87500 17.5 Variable costs Variable Manufacturing costs 85000 17 85000 17 Variable selling costs 0 0 Total Variable costs 85000 85000 Contribution margin 45000 2500 Fixed costs Fixed manufacturing costs One time packaging & distribution costs 2500 2500 Fixed marketing costs Total fixed costs 2500 2500 Operating Income 42500 0 Requirement 5 If GGI is very strict about its quality and wants to maintain the brand name and goodwill, it should not pass on the order to another competing firm whose quality though known to be good but not sure of.

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