manufacturing plant has the capacity to produce 18,000 trophies each month; curr

ID: 2600545 • Letter: M

Question

manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly production is 14,400 trophies. The company normally charges $103 per trophy. Cost data for the current level of production are shown below (a) Anglen Co. manufactures and sells trophics for winners of athletic and other events. Its Variable costs: $460,800 labour...$316,800 Selling and administrativ15,840 Direct materials... Fixed costs: Manufacturing... $404,640 Selling and administrative.$74,880 The company has just received a special one-time order for 900 trophies at $48 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs. Required: Should the company accept this special order? Why? Show computations to support your answer (13 marks)

Explanation / Answer

Solution:

The problem is related to whether accept the special order or not. The order should be accepted if company get profit or the order is profitable to the company.

In this type of questions, the relevant cost associated with the product plays a major role for decision making.

What is Relevant Cost ?

Relevant Cost is the future cost to be incurred and changes under each alternative course of action.

The cost which will incur in the future and different under each alternative course of action. In the current problem, the cost which will incur if the special order is accept is the relevant cost.

Normally, the direct material cost, direct labor cost and variable manufacturing overheads or variable costs are considered relevant cost since these are the costs which vary with the production volume.

Fixed Costs are not treated as Relevant Cost since it is the cost which already been incurred and does not have any influence on the decision making whether company accept order or not. The fixed Cost is the cost which does not change irrespective of the production volume.

The question says that for this special order variable selling and administrative costs would not be incurred.

Hence, the relevant cost for this special order is as follows:

Total Cost for 14,400 Trophies

Relevant Cost per Unit

Variable Costs:

Direct materials

$460,800

$32.00

Direct Labor

$316,800

$22.00

Total Relevant Cost per unit

$54.00

Now, we have found out the per unit relevant cost $54. This is the cost if the company accepts the special order.

The Price per unit offered for Special Order = $48

The Relevant Cost per unit for making the product = $54

Since, the cost of making the product $54 per unit is higher than the price offered $48 per unit, the company should not accept this special order.

Company will incur loss per unit if the special order is accepted = $54 – 48 = $6 per unit loss.

Total Loss if the company accept special order = $6 * 900 = $5,400

Hence, the company should not accept the special order.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question. Please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you