Problem 13-23 Effect of order quantity on special order decisions Ellis Quilting
ID: 2348470 • Letter: P
Question
Problem 13-23 Effect of order quantity on special order decisionsEllis Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Ellis made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized her.
Materials cost ($25 per unit * 20,000) $ 500,000
Labor cost ($22 per unit * 20,000) 440,000
Manufacturing supplies ($2 * 20,000) 40,000
Batch-level costs (20 batches at $4,000 per batch) 80,000
Product-level costs 160,000
Facility-level costs 290,000
Total costs $1,510,000
Cost per unit = $1,510,000 / 20,000 = $75.50
Required
a. Kent Motels has offered to buy a batch of 500 blankets for $56 each. Ellis
Explanation / Answer
a)
Materials cost ($25 per unit x 500) $ 12,500
Labor cost ($22 per unit x 500) 11,000
Manufacturing supplies ($2 x 500) 1,000
Batch-level costs (1 batch @ 4000) 4,000
Total cost $28,500
Cost per unit = $28,500 ÷ 500 = $57
Ellis should not accept this special order because it cost Ellis $57 per unit and Kent motels is only offering to pay $56 per unit which would result in a loss for Ellis.
b)
Materials cost ($25 per unit x 1000) $ 25,000
Labor cost ($22 per unit x 1000) 22,000
Manufacturing supplies ($2 x 1000) 2,000
Batch-level costs (1 batch @ 4000) 4,000
Total costs $53,000
Cost per unit = $53,000 ÷ 1000 = $53
If Kent offered to purchase 1000 blankets, the cost per unit would only be $53. Under these circumstances, Ellis should accept the order because he will be able to make a $3 per blanket profit.
Materials cost ($25 per unit x 500) $ 12,500
Labor cost ($22 per unit x 500) 11,000
Manufacturing supplies ($2 x 500) 1,000
Batch-level costs (1 batch @ 4000) 4,000
Total cost $28,500
Cost per unit = $28,500 ÷ 500 = $57