Oriole Packaging Company is a leading manufacturer of cardboard boxes and other

ID: 2562842 • Letter: O

Question

Oriole Packaging Company is a leading manufacturer of cardboard boxes and other product packaging solutions. One of the company’s major product lines is custom-printed cake boxes that are sold to some of the country’s best known bakeries at a price of $0.50 per box. To maintain its high-quality image, Oriole uses a thick premium coated paper for all of its cake boxes. Based on annual production of 1,000,000 boxes, Oriole’s cost for producing a box is as follows:

Andrea Borden, a recent graduate of the Culinary Institute of America, is opening a new bakery in her hometown. She recently contacted Brad Lail, Oriole’s top salesperson, about purchasing cake boxes for her new store. Brad described Oriole’s boxes, emphasizing the high-quality paper and the unique printing process the company uses. Andrea is looking for ways to lower her operating costs, so after hearing Brad describe Oriole’s boxes, she told him that all she needed was a simple, unprinted box. Andrea also told Brad that she needs 9,800 boxes and is willing to pay $0.27 per box.

(a) Based on Andrea’s offer of $0.27 per box for an unprinted box, should Oriole accept Andrea’s order? Oriole currently has excess production capacity and can easily accommodate Andrea’s order in the production schedule.

(b) Since Andrea wants a simple box, Brad is exploring using a lighter-weight paper for her boxes. He has found a suitable paper that will cost $0.12 per box. If Oriole uses this lighter-weight paper for Andrea’s boxes, should the company accept Andrea’s order at a price of $0.27 per box? Oriole currently has excess production capacity and can easily accommodate Andrea’s order in the production schedule.

(c) After visiting with Andrea, Brad received a fax from one of London’s top bakeries. The bakery’s normal box supplier suffered some fire damage and is unable to ship the bakery’s order of 9,800 boxes this month. The bakery’s owner is asking if Oriole can fill a onetime rush order of 9,800 boxes printed with the bakery’s logo. The bakery is willing to pay a 10% price premium to expedite the order. If Oriole accepts the order, it will incur $806 in export taxes and shipping.

Calcuate the Profit on special order.

Should Oriole accept the London bakery’s offer?

Paper $0.17 Ink 0.04 Direct labor 0.05 Variable overhead 0.07 Fixed overhead 0.10 Total cost per box $0.43

Explanation / Answer

Oriole Packaging Company

Step1 – Determination of total cost per box:

Paper $0.17

Direct labor $0.05

Variable overhead $0.07

Total variable cost $0.29

Offer price $0.27

Contribution margin ($0.02)

The total variable cost of $0.29 per box is higher than the price per box of $0.27 offered by Andrea. Hence, acceptance of the order would result in a negative contribution margin of $0.02. This indicates that the price offered does not cover the direct production cost. So, the offer of $0.27 for an unprinted box fails to cover the direct costs and hence the offer is not profitable to Oriole.

Note: since Andrea’s offer of $0.27 is for an unprinted box, the cost of ink ($0.04) has been excluded from the total variable cost of the box.

Since the company has excess capacity, the offer would have been acceptable, had the offer resulted in a positive contribution margin.

Hence, the decision is ‘Oriole should not’ to accept the order.

Cost and contribution margin per box-

Paper $0.12

Direct labor $0.05

Variable overhead $0.07

Total variable cost $0.24

Offer price $0.27

Contribution margin $0.03

Since using the lighter-weight paper for Andrea’s boxes results in a contribution of $0.03 per box the offer can be accepted. Also, since the company has excess production capacity and can easily accommodate Andrea’s order in the production schedule, any contribution earned is profitable. With excess capacity, any contribution earned would absorb some portion fixed costs of the company and results in overall increase in profitability.

Hence, the decision is ‘Oriole should accept the order’.

Profit on special order

Per unit

Total

Sales revenue for 9,800 boxes

$0.55

$5,390

Less: Variable costs

Paper

$0.17

$1,666

Ink

$0.04

$392

Direct labor

$0.05

$490

Variable overhead

$0.07

$686

total variable cost per box

$0.33

$3,234

Contribution margin

$0.22

$2,156

Less: Export taxes and shipping

$806

Net Profit

$1,350

Note: Since the bakery is willing to pay 10% price premium to expedite the rush order, the price for the order is arrived at as follows,

Actual price per box = $0.50

Add: 10% premium $0.05

Price for the order $0.55 per box

Since, Oriole has excess production capacity, acceptance of the special order from the London’s bakery is profitable.

Also, since the company has excess production capacity any order that earns a contribution margin is profitable.

The order is profitable to the company.