SPECIAL ORDER DECISION Renella Company manufactures professional staplers and ha
ID: 2581558 • Letter: S
Question
SPECIAL ORDER DECISION Renella Company manufactures professional staplers and has been approached by a new customer with an offer to purchase 20,000 staplers at a price of $10.00 per stapler. Providing the 20,000 staplers to the new customer will have no impact on Renella Company's present sales to its existing customers. Renella Company's production capacity for producing staplers is 100,000 staplers per year and Renella Company has budgeted sales of staplers next year to its existing customers to be 75,000 staplers. Renella Company's regular Sales Price for its staplers is $16.00 per stapler. The production cost per unit for Renella Company's staplers is as follows $ 4.20 3.60 Direct Materials Direct Labor Variable Manufacturing Overhead 1.80 Fixed Manufacturing Overhead2.10 Total Production Cost Per Unit $11.70 If Renella Company accepts the special order request, no Fixed Manufacturing Overhead Costs will be incurred since Renella Company has sufficient excess production capacity Required 1. What are the alternatives for Renella Company in regards to the Special Order request? 2. Should Renella Company accept the special order and if accepted by how much will the Net Income (Operating Income) of Renella Company increase or decrease? 3. Briefly explain the importance of the statement that "Providing the 20,000 staplers to the new customer will have no impact on Renella Company's present sales to its existing customers".Explanation / Answer
1) The company can accept the special order of the customer or reject the special order of the customer
2) Calculation of Gross profit of special order (Amount in $)
In determining whether to accept an offer or not, only the relevant cost in accepting the offer should be considered. Thus in this case the company has excess capacity of 25,000 units and the fixed manufacturing cost remains unchanged irrespective of accepting or rejecting the decision.
There is a gross profit of $8,000 in accepting the offer, therefore Renella company should accept the special order.
3) In deciding whether to accept the offer or not it is very important that accepting of offer has no impact on company's existing customers because any company can not take an additional order by rejecting the demand of its existing customers. if any company reject the existing customer for accepting an offer it will result in disreputation of company.
Therefore the statement "Providing the 20,000 staplers to the new customer will have no impact on the Renella company's present sales to its existing customers" is very important in deciding whether to accept the offer or not.
Direct Materials (A) 4.20 Direct Labor (B) 3.60 Variable Manufacturing Overhead (C) 1.80 Relevant Manufacturing Costs (A+B+C) 9.60 Special Order sales price per unit 10 Relevant Manufacturing Costs per unit (9.60) Gross Profit per unit 0.40 No. of units 20,000 Gross profit (20,000*0.40) 8,000Related Questions
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