Special Order; ABC Costing (Continuation of Problem 11-33) Assume the same information as for Problem 11-33, except that the $12.00 fixed manufacturing overhead cost per unit consists of facility-level costs ($9.00/unit at the 20,000-unit output level), with the remainder being setuprelated (i.e., batch-level) costs. Assume that the setup related costs increase in total with the number of batches produced and that the facility-level fixed costs do not vary in total, either with the number of units produced or the number of batches produced during a period.
Required 1. What is the total fixed manufacturing overhead cost for the period? Break down (that is, decompose) this total cost into its component parts (i.e., batch-related overhead costs and facility-related fixed overhead costs). Round all answers to nearest whole dollar. 2. Calculate the relevant unit and total cost of the special order, including the new information about batch-related costs. Assume, as before, the one-time delivery cost of $2,500. Round the total cost to the nearest whole dollar; round the per-unit relevant cost to 2 decimal places. 3. If accepted, how would the special order affect GGI’s short-term operating income?
Problem 11-33~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Special Order Green Grow Inc. (GGI) manufactures lawn fertilizer. Because of the product’s very high quality, GGI often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI’s operating capacity is 22,000 one-hundred-pound bags per month, and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000 one-hundred-pound bags of fertilizer for $130,000 from APAC, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a onetime $2,500 cost for GGI. The special order would be processed in two batches of 2,500 bags each. (No incremental batch-level costs are anticipated. Most of the batch-level costs in this case are shortterm fixed costs, such as salaries and depreciation.) The following information is provided about GGI’s current operations:
No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags.
Required
1. What is the total relevant cost of filling this special sales order, rounded to nearest whole dollar? 2. What would be the change in operating income (to nearest whole dollar) if the special order is accepted? 3. What is the break even selling price per unit for the special sales order (i.e., what is the selling price that would result in a zero effect on operating income)? Round answer to 2 decimal places. 4. Prepare comparative income statements, using the contribution format, for both the current situation and assuming the special order is accepted at the break even price determined in requirement 3. 5. Suppose that after GGI accepts the special order, it finds that unexpected production delays will not allow it to supply all 5,000 units from its own plants and meet the promised delivery date. It can provide the same materials by purchasing them in bulk from a competing firm. The materials would then be packaged in GGI bags to complete the order. GGI knows the competitor’s materials are very good quality, but it cannot be sure that the quality meets its own exacting standards. There is not enough time to carefully test the competitor’s product to determine its quality. What should GGI do? Specifically, discuss ethical and strategic issues associated with the decision.