Problem III (20 points) Special pricing decisions UNR Products produces and sell

Question

Problem III (20 points) Special pricing decisions UNR Products produces and sells plastic soda cups with specialized logos on the front. They sell the cups in batches of 500 for $125 per batch. The company has the capacity to produce 100 batches per month but averages much less. When 75 batches are sold a month, each batch has $40 worth of variable costs and $5 worth of fixed overhead costs allocated to it. The company has been approached by a local fireman's association who wishes to purchase three batches of cups for $50 per batch Requirements 1. Should the museum accept the special pricing offer? Show the increase/decrease on operating income to support your answer. 2. Identify long-term and/or non-financial factors the Museum should consider in deciding whether to accept special sales order.

Explanation / Answer

1. Yes. The special pricing offer should be accepted as it will result in an increase in operating income of $30.

Fixed overhead costs are irrelevant since they are not affected by the special order as JNR has unutilized capacity to take on the special order.

2. The long-term and/or non-financial factors that should be considered are whether the special order pricing will affect the sales to other regular customers and its normal selling price.

Selling price per batch $ 50 Variable costs 40 Contribution per batch $ 10 Number of batches ordered 3 Increase in operating income due to special order $ 30

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