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

ID: 2564792 • Letter: S

Question

Sunland 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, Sunland uses a thick premium coated paper for all of its cake boxes. Based on annual production of 1,000,000 boxes, Sunland’s cost for producing a box is as follows: Paper $0.15 Ink 0.03 Direct labor 0.05 Variable overhead 0.08 Fixed overhead 0.09 Total cost per box $0.40 Andrea Borden, a recent graduate of the Culinary Institute of America, is opening a new bakery in her hometown. She recently contacted Brad Lail, Sunland’s top salesperson, about purchasing cake boxes for her new store. Brad described Sunland’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 Sunland’s boxes, she told him that all she needed was a simple, unprinted box. Andrea also told Brad that she needs 11,400 boxes and is willing to pay $0.25 per box.

(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 11,400 boxes this month. The bakery’s owner is asking if Sunland can fill a onetime rush order of 11,400 boxes printed with the bakery’s logo. The bakery is willing to pay a 10% price premium to expedite the order. If Sunland accepts the order, it will incur $788 in export taxes and shipping. Calcuate the Profit on special order.

Explanation / Answer

Sunland Packaging Company

Calculation of profit on special order:

Profit on special order

Per unit

Total

Sales revenue for 11,400 boxes

$0.55

$6,270

Less: Variable costs

Paper

$0.15

$1,710

Ink

$0.03

$342

Direct labor

$0.05

$570

Variable overhead

$0.08

$912

total variable cost per box

$0.31

$3,534

Contribution margin

$0.22

$2,736

Less: Export taxes and shipping

$788

Net Profit

$1,948

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