TB Problem Qu. 12-192 Kneller Co. manufactures and sells medals.. Kneller Co. ma

Question

TB Problem Qu. 12-192 Kneller Co. manufactures and sells medals.. Kneller Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 15,000 medals each month; current monthly production is 10,000 medals. The company normally charges $101 per medal. Cost data for the current level of production are shown below: Variable costs: Direct materials Direct labor Selling and administrative $489, 600 $156,700 $ 25,400 Fixed costa Manufacturing Selling and administrative $146, 600 $ 80,200 The company has just received a special one-time order for 400 medals at $89 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs. Assume that direct labor is a variable cost. Required: Should the company accept this special order? Accepted Not accepted

Explanation / Answer

Relevant costs to consider while accepting the special order; $ Direct materails cost per medal (489600/10000) 48.96 Direct labor (156700/10000) 15.6 Total relevant costs 64.56 Special order price per medal 89 Since the total relevant cost per medal is less than the speicial order price the company should accept the order Note : The fixed cost is a sunk cost and hence it shall not be considered.

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