Case Study Of Abbie Johnson Consider The Special Order

Decent Essays
Consider the special order from Abbie Jenkins.
Variable and fixed costs per unit (or per 100 brochures) at the current monthly production level of 150,000 brochures can be determined from the data in case Exhibit 1, as follows: Manufacturing costs:
Direct material, variable
Direct labor, variable
Direct labor, fixed Manufacturing overhead, variable Manufacturing overhead, fixed
Total manufacturing costs
Nonmanufacturing costs: Marketing, variable Marketing, fixed Corporate, fixed
Total nonmanufacturing costs Total costs
Variable manufacturing costs per unit Variable nonmanufacturing costs per unit Fixed manufacturing costs per unit
Fixed nonmanufacturing costs per unit
1a. Should Johnson accept the special order?
Cost per 100 brochures
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Income would be $1,500 lower if FinePrint accepts the special order. (It should be noted that because this is a one-time special order, FinePrint should make this decision considering much more than just the one-time financial impact. The implications for regular customers are likely the driving force behind this particular decision.)
Alternatively, we could approach the analysis in the following way. FinePrint has no excess capacity, so printing capacity is a constrained resource. FinePrint should choose the brochures with the greatest contribution margin.
Contribution margin per 100 brochures:
Revenues Variable costs:
Direct material, variable
Direct labor, variable Manufacturing overhead, variable Marketing, variable
Total variable costs Contribution margin
Current work $17.00
4.00 1.00 1.00 1.00
$ 7.00 $10.00
Special order $10.00
4.00 1.00 1.00
$ 6.00 $ 4.00
FinePrint should not accept the special order. It has a contribution margin of $4.00 per 100 brochures versus $10.00 per 100 brochures for the current work.
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It generates additional income of $1,000.
Note that students might be tempted to decline the special order because they observe either that (1) the $10 price is less than the $15 total cost per 100 brochures or (2) the $10 price is less than the $10.25 manufacturing cost per 100 brochures. But because the incremental profit at $1,000 is greater than zero, FinePrint should accept the order.
The instructor may consider posing the following additional questions:
Should FinePrint accept the order at $6.50? Because $6.50 is less than the $7.00 variable cost per 100 brochures for the current work, some students will say that FinePrint should not accept the order. But there are no variable marketing costs for the order, so the variable cost per 100 brochures for the order is $6.00. Thus, FinePrint should accept the order even at $6.50.
At what price would FinePrint be indifferent about accepting the order? $1,500 additional costs per 100 brochures/(25,000/100) units of 100 brochures = $6.00. (This is equivalent to the $6.00 variable cost per 100 brochures for the order.)
2. Consider the outsourcing opportunity from Ernest Bradley of SmallPrint Shop. Should FinePrint outsource 30,000 brochures to
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