Special-Order Decision, Alternatives, Relevant Costs Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 85 percent of capacity. A chain of drugstores has offered to buy 26,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized with the drugstore chain’s logo. While the normal selling price is $6.30 per box, the chain has offered just $3.30 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows: Direct materials $1.60 Direct labor 0.36 Variable overhead 0.06 Fixed overhead 2.15 Total cost per box $4.17 Fixed overhead is $427,000 per year and will not be affected by the special order. Normally, there is a commission of 6 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $15,900 for the design and setup of the machinery to stamp the drugstore chain’s logo on each box. Required: 1. Which alternative is more cost effective and by how much? The operating income would increase by $ 2. What if Sequoia Paper Products was operating at capacity and accepting the special order would require rejecting an equivalent number of boxes sold to existing customers? Which alternative would be better?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
-
Special-Order Decision, Alternatives, Relevant Costs
Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 85 percent of capacity. A chain of drugstores has offered to buy 26,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized with the drugstore chain’s logo. While the normal selling price is $6.30 per box, the chain has offered just $3.30 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows:
Direct materials $1.60 Direct labor 0.36 Variable overhead 0.06 Fixed overhead 2.15 Total cost per box $4.17 Fixed overhead is $427,000 per year and will not be affected by the special order. Normally, there is a commission of 6 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $15,900 for the design and setup of the machinery to stamp the drugstore chain’s logo on each box.
Required:
1. Which alternative is more cost effective and by how much?
The operating income would increase by $
2. What if Sequoia Paper Products was operating at capacity and accepting the special order would require rejecting an equivalent number of boxes sold to existing customers? Which alternative would be better?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
