Special-Order Decision, Alternatives, Relevant Costs Sequoia Paper Products, Inc

Question

Special-Order Decision, Alternatives, Relevant Costs

Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 90 percent of capacity. A chain of drugstores has offered to buy 32,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized with the drugstore chain’s logo. While the normal selling price is $5.30 per box, the chain has offered just $2.90 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows:

Fixed overhead is $390,000 per year and will not be affected by the special order. Normally, there is a commission of 9 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $15,900 for the design and setup of the machinery to stamp the drugstore chain’s logo on each box.

Required:

1. Which alternative is more cost effective and by how much?
Accept the special order

The operating income would increase by $.

Direct materials $1.90 Direct labor 0.33 Variable overhead 0.08 Fixed overhead 2.15   Total cost per box $4.46

Explanation / Answer

Per unit Total 32000 boxes Incremental revenue 2.9 92800 Incremental costs: Variable costs: Direct materials 1.9 60800 Direct labor 0.33 10560 Variable manufacturing overhead 0.08 2560 Total variable cost 2.31 73920 Fixed costs: Purchase of special tool 15900 Total Incremental costs 89820 Incremental net operating income(loss) 2980 The operating income would increase by $ 2980

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