Biello Co. manufactures and sells medals for winners of athletic and other event
ID: 2349201 • Letter: B
Question
Biello 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 14,250 medals. The company normally charges $115 per medal. Cost data for the current level of production are shown below.Variable Costs
Direct Materials $969,000
Direct Labor $270,750
Selling and Administrative $270,075
Fixed Costs
Manufacturing $370,550
Selling and Administrative $89,775
The company has just received a special one-time order for 600 medals at $102 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?
Explanation / Answer
On Accepting the Order for additional 600 medals :
Selling Price 600 * 102 $61200
(-) Direct Materials 600 * 68 $40800
(969000/14250 = 68)
(-) Direct Labour 600 * 19 $11400
(270750/14250 = 19)
Contribution $9000
Decision : The Biello Co. must ACCEPT the order for manufacturing 600 medals as this CONTRIBUTION is an additional gain over the current production of 14250 medals. The Company has the idle capacity of (15000 – 14250= 750) medals out of which if 600 medals produced can utilize the fixed cost spread over the range of 15000 medals with no extra variable Selling and Admn. Expense.
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