Question

How do I do this? See the screenshot for (a).

Total cost data follow for Glendale Manufacturing Company, which has a normal capacity per period of 8000 unitsof product that sell for $60 each. For the foreseeable future, regular sales volume should continue to equal to normal capacity

Direct materials | $100,800 |

Direct labor | $62,400 |

Variable manufacturing overhead | $46,800 |

Fixed manufacturing overhead | $38,400 |

Selling expense (note 2) | $35,200 |

Adminstrative expense (fixed) | $15,000 |

$298,600 |

Notes:

1. Beyond normal capacity, fixed overhead costs increase $1,800 for each 500 units or *fraction thereof* until a maximum capacity of 10,000 units is reached.

2. Selling expenses consist of a 6% sales commission and shipping costs of 80 cents per unit. Glendalepays only three-fourths of the regular sales commission on sales totaling 501 to 1000 units and only two-thirds the regular commission on sales totaling 1000 units or more.

Glendale's sales manager has received a special order for 1200 units from a large discount chain at a price of $36 each, FOB factory. The controller's office has furnished the following additional cost data related to the special order:

1. Changes in the product's design will reduce direct materials costs $1.50 per unit

2. Special processing will add 20% to the per-unit direct labor costs.

3. Variable overhead will continue at the same proportion of direct labor costs.

4. Other costs should not be affected

Problems:

a. Present an analysis supporting a decision to accept or reject the special order.

b. What is the lowest price Glendale could receive and still make a a $3600 profit before income taxes on the special order?

c. What general qualitative factors should Glendale consider?

Step 1

Differential analysis is an analysis conducted to decide whether an offer should be accepted or rejected. If there is a profit after conducting the analysis, the offer should be accepted. If there is a loss, the offer should be rejected.

Step 2

Working Notes:

Total variable cost= No. of units × cost per unit

= 1,200 × $28.92

= $34,704

Contribution margin= Total sales – variable cost

= $43,200 - $34,704

= $8,496

Fixed cost= $1,800 × (1,200 ÷ 500)

= $1,800 × 2.4

= $1,800 × 3

= $5,400

Here, 2.4 is rounded off to 3 as it is given in the question that fixed cost increases for 500 units or fraction part thereof.

The offer should be accepted, as there is a profit of $3,096.

Step 3

b. Lowest sales price will be ...

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