11-33 Special Order (45-60 min)
1. In general, relevant cost equals the sum of out-of-pocket costs (variable
+ fixed), plus opportunity cost (if any). In the present case, these costs
total $147,500, as follows:
Out-of-Pocket Costs:
Variable costs:
Manufacturing cost (@ $17 per unit) $85,000
Opportunity Cost:
No. of lost unit sales (if any) 3,000
CM per unit, regular sales:
Selling price, per unit $40.00
Variable manufacturing cost $17.00
2. Operating income with the special order will decrease by $17,500. The
only relevant variable cost is the $17 variable manufacturing cost per
full. Thus, if the special order is accepted, there would be a sales loss of
3,000 units to regular customers.
Contribution margin lost (foregone) on 3,000 units of lost sales
= (price – variable manufacturing cost – variable selling cost) × # lost
units
= ($40 − $17 − $3) × 3,000 units = $60,000
Summary of relevant costs:
Variable manufacturing costs ($17 × 5,000) $ 85,000
One-time (fixed) delivery costs 2,500
11-33 (Continued-1)
Note that if GGI had available capacity, the only relevant cost would be
the variable manufacturing cost and the delivery cost, which would total
3. The breakeven selling price is the price that just equals total relevant
cost of the special sales order. Put another way, the breakeven price is
the selling price per unit that would leave operating income unchanged.
Total relevant cost (from Part 1 above) = $147,500
4. Comparative income statements (contribution format), with and without
special order:
Note: Variable selling costs ($3/unit) are not incurred on the special
sale units. Thus, if the special sales units are sold at $29.50 per
unit, operating income is left unchanged.
5. There are both ethical and strategic issues for GGI. From a strategic
view, GGI would suffer severe damage to its reputation if APAC were to
have any problems with the purity of the special order. One of the
reasons APAC has requested the special order from GGI is because of
11-34 Special Order; ABC Costing (continuation of Pr. 11-33) (30-45 min)
1. Total Fixed Manufacturing Cost and Breakdown into Components:
Total fixed manufacturing costs are $12/unit × 20,000 units = $240,000:
Total batch-related costs ($3/unit × 20,000 units) = $ 60,000
Incremental costs ($1,000/batch × 20 batches) = $20,000
2.
3. The
total relevant cost of $236,000 is much greater than the special order
11-35 Special Order; Strategy; International (75-90 min)
1. The standard direct labor hour (DLH) per finished valve is ½ hour.
2. The analysis of accepting the Glasgow proposal is presented below.
Totals for
Per unit 120,000 units
Incremental revenue $21.00 $2,520,000
Incremental costs
Variable costs:
Direct materials 6.00 720,000
Direct labor 8.00 960,000
Variable overhead 3.00 360,000
Total variable costs $17.00 $2,040,000
Fixed overhead:
Supervisory and clerical costs
3. The minimum unit price that Williams could accept without reducing
operating income must cover variable costs plus the additional fixed
costs; in this case, there are no opportunity costs. The $30 suggested
selling price is irrelevant for the special order:
Incremental variable costs, per unit:
Direct materials $6.00
Direct labor $8.00
Problem 11-35 (continued-1)
4. Use the Goal Seek option in Excel to solve for the minimum unit price
determined in 3 above.
Step #1: Define the Appropriate Equation to Be Solved
Note: the decision cell (to be solved) is C112; Cell C113 =
C111*C112; cell C115 = SUM(C85:C87); Cell C119 = C116
+ C117 + C118; Cell C120 = C113 – C118
Step #2: Run Goal Seek (to Solve the Equation)
Note: Cell C112 contains the selling price per unit; cell C120 is the
effect on operating income (i.e., the difference between
incremental revenues and incremental costs of the special
sales order).
Problem 11-35 (continued-2)
Step #3: Results
In other words, a selling price of $17.40 exactly offsets incremental
costs of the special order, resulting in a net change of $0 in terms of
operating income.
5. Determination of minimum (i.e., breakeven) selling price per unit in
the face of opportunity costs (lost sales to regular customers):
The minimum unit price that Williams could accept without reducing
Problem 11-35 (continued-3)
Incremental variable cost, per unit:
Direct materials $6.00
Direct labor $8.00
Variable overhead $3.00 $17.00
Incremental fixed costs, per unit ($48,000 ÷ 120,000 units) 0.40
Opportunity Cost:
Total lost sales (in units) (4 × 5,000 units) 20,000
Regular selling price per unit $30.00
Less: variable costs (per unit):
Direct materials $6.00
Direct labor $8.00
Variable manufacturing overhead $3.00
6. Williams Company should consider the following strategic factors before
accepting the Glasgow Industries order:
The effect of the special order on Williams’ sales at regular
prices.
The possibility of future sales to Glasgow Industries and the
effects of participating in the international marketplace.
The company’s “relevant range” of activity and whether or not
the special order will cause volume to exceed this range
Problem 11-35 (continued-4)
The ethical and competitive issues of helping a competitor in
distress.
7. The international issues Williams should consider include:
What customs duties and import/export restrictions might affect
the special order and any future business with Glasgow?
While this special order will be completed in the relatively short
time of a few months, foreign exchange rates might change
significantly in this period. What does the special order
agreement say regarding the sales price, in pounds or dollars?
Might the Glasgow special order introduce Williams to new
markets in Scotland or elsewhere in Britain or Europe? If
Williams is not now significantly involved in global sales, how
might the firm use this opportunity to increase its exposure in
foreign markets?