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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Special-Order Decision, Qualitative Aspects

Randy Stone, manager of Specialty Paper Products Company, was agonizing over an offer for an order requesting 5,000 boxes of calendars. Specialty Paper Products was operating at 70% of its capacity and could use the extra business. Unfortunately, the order’s offering price of $4.20 per box was below the cost to produce the calendars. The controller, Louis Barns, was opposed to taking a loss on the deal. However, the personnel manager, Yatika Blaine, argued in favor of accepting the order even though a loss would be incurred. It would avoid the problem of layoffs and would help to maintain the company’s community image. The full cost to produce a box of calendars follows:

Chapter 8, Problem 63P, Special-Order Decision, Qualitative Aspects Randy Stone, manager of Specialty Paper Products

Later that day, Louis and Yatika met over coffee. Louis sympathized with Yatikás concerns and suggested that the two of them rethink the special-order decision. He offered to determine relevant costs if Yatika would list the activities that would be affected by a layoff. Yatika eagerly agreed and came up with the following activities: an increase in the state unemployment insurance rate from 1% to 2% of total payroll, notification costs to lay off approximately 20 employees, and increased costs of rehiring and retraining workers when the downturn was over. Louis determined that these activities would cost the following amounts:

  • Total payroll is $1,460,000 per year.
  • Layoff paperwork is $25 per laid-off employee.
  • Rehiring and retraining is $150 per new employee.

Required:

  1. 1. CONCEPTUAL CONNECTION Assume that the company will accept the order only if it increases total profits (without taking the potential layoffs into consideration). Should the company accept or reject the order? Provide supporting computations.
  2. 2. CONCEPTUAL CONNECTION Consider the new information on activity costs associated with the layoff. Should the company accept or reject the order? Provide supporting computations.

1.

To determine

Describe whether Company S should accept the order to reject the order.

Explanation

Special-Order Decision:

The main focus of the special-order decision is to decide whether the specially priced order should be rejected or selected. The special orders may help the firms when they are operating at their lower capacity of production.

Use the following formula to calculate the amount of income or loss if the order is accepted:

Income or(loss)=(Incremental revenue per boxIncremental cost per box1)×Number of boxes

Substitute $4.20 for incremental revenue per box, $4.25 for incremental cost per box, and 5,000 for the number of boxes in the above formula.

Income or(loss)=($4.20$4

2.

To determine

Describe whether Company S should accept the order or reject the order while considering new information on activity costs.

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