Special Order Award Plus Co. manufactures medals for winners of athletic events and othercontests. Its manufacturing plant has the capacity to produce 10,000 medals each month; currentmonthly production is 7,500 medals. The company normally charges $225 per medal. Variable costsand fixed costs for the current activity level of 75% follow:[LO 11-1][LO 11-2]ProblemsCurrent Product CostsVariable costsManufacturingLabor $ 375,000Material 300,000Marketing 187,500Total variable costs $ 862,500Fixed costsManufacturing $ 275,000Marketing 225,000Total fixed costs $ 500,000Total costs $1,362,500Award Plus has just received a special one-time order for 2,500 medals at $115 per medal. Forthis particular order, no variable marketing costs will be incurred. Cathy Senna, a managementaccountant with Award Plus, has been assigned the task of analyzing this order and recommendingwhether the company should accept or reject it. After examining the costs, Senna suggested to hersupervisor, Gerard LePenn, who is the controller, that they request competitive bids from vendorsfor the raw materials because the current quote seems high. LePenn insisted that the prices arein line with those of other vendors and told her that she was not to discuss her observations withanyone else. Senna later discovered that LePenn is a brother-in-law of the owner of the current rawmaterials supply vendor.Required1. Calculate both the old (i.e., prior to the special order) average cost per unit and the revisedaverage cost per unit, including the effect of the special sales order. (Round both answers to2 decimal places.) Are either of these two figures relevant for evaluating whether to accept or rejectthe special order? Explain.2. What is the short-term effect on operating profit (to the nearest whole dollar) if Award Plus Co. acceptsthe special sales order? (Round answer to nearest whole number.) 3. What is the breakeven selling price per unit for the special sales order, rounded to 2 decimal places?4. Discuss at least three other considerations that Cathy Senna should include in her analysis of the specialsales order.5. Explain how Cathy Senna should try to resolve the ethical conflict arising out of the controller’sinsistence that the company avoid competitive bidding.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Special Order Award Plus Co. manufactures medals for winners of athletic events and other
contests. Its manufacturing plant has the capacity to produce 10,000 medals each month; current
monthly production is 7,500 medals. The company normally charges $225 per medal. Variable costs
and fixed costs for the current activity level of 75% follow:
[LO 11-1]
[LO 11-2]
Problems
Current Product Costs
Variable costs
Manufacturing
Labor $ 375,000
Material 300,000
Marketing 187,500
Total variable costs $ 862,500
Fixed costs
Manufacturing $ 275,000
Marketing 225,000
Total fixed costs $ 500,000
Total costs $1,362,500
Award Plus has just received a special one-time order for 2,500 medals at $115 per medal. For
this particular order, no variable marketing costs will be incurred. Cathy Senna, a management
accountant with Award Plus, has been assigned the task of analyzing this order and recommending
whether the company should accept or reject it. After examining the costs, Senna suggested to her
supervisor, Gerard LePenn, who is the controller, that they request competitive bids from vendors
for the raw materials because the current quote seems high. LePenn insisted that the prices are
in line with those of other vendors and told her that she was not to discuss her observations with
anyone else. Senna later discovered that LePenn is a brother-in-law of the owner of the current raw
materials supply vendor.
Required
1. Calculate both the old (i.e., prior to the special order) average cost per unit and the revised
average cost per unit, including the effect of the special sales order. (Round both answers to
2 decimal places.) Are either of these two figures relevant for evaluating whether to accept or reject
the special order? Explain.
2. What is the short-term effect on operating profit (to the nearest whole dollar) if Award Plus Co. accepts
the special sales order? (Round answer to nearest whole number.)
3. What is the breakeven selling price per unit for the special sales order, rounded to 2 decimal places?
4. Discuss at least three other considerations that Cathy Senna should include in her analysis of the special
sales order.
5. Explain how Cathy Senna should try to resolve the ethical conflict arising out of the controller’s
insistence that the company avoid competitive bidding.
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