Ironwood Company manufactures a variety of sunglasses. Production information fo

Question

Ironwood Company manufactures a variety of sunglasses. Production information for its most popular line, the Clear Vista (CV), follows: Sales price Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing cost Per Unit $ 56.50 25.00 10.00 6.00 5.00 $ 46.00 Suppose that Ironwood has been approached about producing a special order for 3,300 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 ched to the side of the glasses. The league has offered to pay $54.00 per unit in the special order. Additional costs for the special order total $6.00 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. Additional CM 2-a. Calculate the current contribution margin per unit. (Round your answer to 2 decimal places.) Current CM per Unit 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? O Yes O 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.) Special-Order Price Special-Order Price per Unit per Unit

Explanation / Answer

1. Selling price per unit in special order = $ 54

Variable cost per unit in special order= Direct material+ direct labour+ variable manufacturing overhead+ additional variable cost for special order

= 25+10+6+6= $ 47

Contribution margin for unit in special order = Selling price - Variable cost = 54-47= $ 7

Total additional contribution margin for 3,300 units in special order = 3,300 x 7 = $ 23,100.

2-a Current contribution marginper unit = selling price per unit - total variable cost per unit

= 56.5-(25+10+6) =56.5-41= 15.50 per unit.

2-b No, As the contribution margin per unit in special order is less than normal contribution per unit. It should not accept special order if it is operating at full capacity.

3. Ironwood will be indifferent between accepting or rejecting the special order when contribution per unit of special order is equal to present contribution per unit

Therefore contribution per unit is to be = 15.50 per unit

+ Variable cost in special order per unit = 47.00 per unit

Selling price per unit of special order = 62.50

Therefore Ironwood will be indifferent between accepting or rejecting the special order when  the selling price per unit of special order is $ 62.50.

  

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