Adamyan Co. manufactures and sells medals for winners of athletic and other even

Question

Adamyan 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 12,750 medals. The company normally charges $120 per medal. Cost data for the current level of production are shown below: The company has just received a special one-time order for 700 medals at $83 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

Variable cost

Direct material                    $ 624,750

Direct labor                         $ 306,000  

Total variable cost              $ 930,750

Variable cost per unit = 930,750/12750 = $ 73

Company can accept the order as there is a profit of $ 10 (83-73) .

Total profit = 700 x 10 = 7,000.

[ Note : Fixed cost is sunk cost and is irrelevant for decision making.]

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