ironwood Company manufactures a variety of nglasses Prodcton irtomason for ts mo
ID: 2538910 • Letter: I
Question
ironwood Company manufactures a variety of nglasses Prodcton irtomason for ts most popular line, the Clear Vista (CV), follows Sales price Direct materials Direct labo Variable manufacturing overhead 19.00 5.00 39.00 Foxed manufacturing overhead Total manufacturing cost Suppose that Ironwood has been approached about produong a sooal orderfor 2.700 unts of aatm CV sn asses for a new semprlessio al voleybal Al tnts i he specif eder wond be pe toed in the league's signature colors with a specially designed logo emblem attached to the side of the glasses. The league has offered to pay $4700 per unit in the special order. Additional costs for the special order total $3.00 per unit for miing the special frame color and purchasing the emblem with the league's logo that will be attached to the glasses Required 1. Assume hrwood has the ide …city necessary to accommodate the special order. Calculate the addional contribution margn Ironwood wolld make by accepting the special order. 27.000 2-a. Caloulate the ourrent contribution margin per unit. (Round your answer to 2 decimal places 2-b. up nwood is currenty operating its production facility at fut capacity and accepting h t special order would mean reduoing pnoduction of ts regular cv model. Shouid Ironwood accegt the spe order in this case? O No . Caloulate the special order price per unit at which onwood is indilerent between accepting or rejecting the special order (Hound your answer to 2 decimal places per UnitExplanation / Answer
Ironwood Company
Cost per unit to make –
Direct materials$19
Direct labor$10
Variable OH$5
Additional cost$3
Total relevant cost $37
Selling price $47
Contribution margin per unit $10
Additional contribution margin = 2,700 units x $10 = $27,000
2a. Calculation of current contribution margin per unit:
Contribution margin per unit = sales price per unit – variable cost per unit
Sales price per unit = $50
Variable cost per unit –
Direct materials$19
Direct labor$10
Variable OH$5
Total variable cost per unit= $34
Contribution margin per unit = $50 = $34 = $16
2b. Analysis of accepting or rejecting special order assuming working at full capacity:
Comparison of contribution margins under situations of accepting the order at full capacity –
When the company is working at full capacity the contribution margin on 2,700 units = 2,700 x $16 = $43,200
Contribution margin from the special order = 2,700 x $10 = $27,000
Hence, accepting the order would result in a loss of contribution margin by $16,200 to the company. Hence, the company should reject the special order when operating at full capacity.
The answer is No.
Ironwood would be indifferent when the cost of making the special component equals the selling price.
The relevant costs are,
Avoidable costs + opportunity cost = selling price of special component
Avoidable costs = total variable costs to make the special component = $37 ($19 +$10 + $5 + $3)
Opportunity cost = loss of contribution from regular sales = $16
Avoidable cost + opportunity cost = $37 + $16 = $53
Thus, at the selling price of $53 per unit, Ironwood would be indifferent between accepting or rejecting the special order.
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