50.1K

Verified Solution

Link Copied!

11-32Special 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:

		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 controllers insistence that the company avoid competitive bidding.

Answer & Explanation Solved by verified expert

See Answer