Question 4: Relevant Costs and Decision Making (20 marks in total) Gordon Manufa

ID: 2335589 • Letter: Q

Question

Question 4: Relevant Costs and Decision Making (20 marks in total) Gordon Manufacturing is approached by a new customer to fulfill a 4,000 unit, one-time-only special order for a product similar to the one offered to existing customers. At present, the company has excess operating capacity. The following data apply to sales to existing customers: Variable Costs: Direct materials $ 100 Direct labour $ 50 Manufacturing support $ 90 Marketing costs $ 35 Fixed Costs: Manufacturing support $ 115 Marketing costs $ 40 Targeted selling price $ 500 Required: 4a. For Gordon Manufacturing, what is the total relevant cost of making this special order? 4b. If the new customer is offering $350 per unit sold, should the company accept the special offer? Explain. 4c. Suppose the company is already operating at capacity when the special order is received. What would be the relevant cost of accepting the special order? 4d. List and explain any TWO potential problems that should be avoided when conducting a relevant cost analysis. Use the textbook and other relevant sources to support your answer.

Explanation / Answer

4-a

relevant cost of making this special order

Direct material + direct labor + Manufacturing support +Marketing cost

100+50+90+35

275

4-b

profit on accepting the new offer

(selling price-relevant cost)*units sold

(350-275)*4000

300000

4-c

What would be the relevant cost of accepting the special order

Direct material + direct labor + Manufacturing support +Marketing cost+ manufacturing support

100+50+90+35+115

390

4-d

(1)Assuming that all variable costs are relevant and all fixed costs are irrelevant. 2. Using unit-cost data directly

4-a