Palmer Company manufactures and sells trophies for winners of athletic and other
ID: 2421058 • Letter: P
Question
Palmer Company manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 22,000 trophies each month; current monthly production is 20,900 trophies. The company normally charges $62 per trophy. Cost data for the current level of production are shown below.
Variable Costs
Direct Materials
$541,880
Direct Labor
$193,800
Selling and Administrative
$41,100
Fixed Costs
Manufacturing
$250,000
Selling and Administrative
$133,000
The company has just received a special one-time order for 800 trophies at $31 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? Provide numerical support for your decision.
Variable Costs
Explanation / Answer
Solution:
Monthly production = 20,900 trophies
Selling price per trophy =$62
Cost sheet for 20,900 trophies at current production level:
Cost sheet for special order of 800 trophies= 20,900 + 800 = 21,700 trophies:
Here, the selling price is calculated as under:
(20,900 trophies * $62) + (800 trophies * $31) = $1,320,600
The variable costs per unit will remain the same and it is multiplied by 21,700 trophies to arrive at the total cost.
Decision: The company should not accept the proposal as the profit per unit has decreased because of the additional production. The profits before taking up the order where higher than after accepting the proposal. Hence the proposal should be rejected.
Particulars ($) Per unit ($) Direct materials $541,880 25.93 Direct labor 193,800 9.27 Selling and Admin 41,100 1.97 Total variable cost per unit 37.17 Fixed costs Manufacturing 250,000 Selling and admin 133,000 Total cost 1,159,780 Selling price 1,295,800 62 Profit 136,020 6.51Related Questions
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