17\' Kneller Co. manufactures and sells medals for winners of athletic and other

ID: 2410829 • Letter: 1

Question

17'

Kneller Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 23,000 medals each month; current monthly production is 10,000 medals. The company normally charges $82 per medal. Cost data for the current level of production are shown below:

The company has just received a special one-time order for 400 medals at $63 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?

a. Accepted

b. Not accepted

Variable costs: Direct materials $ 397,500 Direct labor $ 127,200 Selling and administrative $ 20,600 Fixed costs: Manufacturing $ 118,800 Selling and administrative $ 65,000

Explanation / Answer

ANS) Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit.

Direct materials...............................................................

$397,500

Direct labor.....................................................................

127,200

Total................................................................................

$524,700

Current monthly production...........................................

10,000

Average direct materials and direct labor cost per unit..

$52.74

Since price on the special order is $63 per medal and the relevant cost is only $52.47, the company would earn a profit of $10.53 per medal. Therefore, the special order should be accepted.