Palmer Company manufactures and sells trophies for winners of athletic and other
ID: 2419846 • Letter: P
Question
Palmer Company manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 22,000 trophies each month; current monthly production is 20,900 trophies. The company normally charges $62 per trophy. Cost data for the current level of production are shown below.
Variable Costs
Direct Materials
$541,880
Direct Labor
$193,800
Selling and Administrative
$41,100
Fixed Costs
Manufacturing
$250,000
Selling and Administrative
$133,000
The company has just received a special one-time order for 800 trophies at $31 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.
Required:
Should the company accept this special order? Provide numerical support for your decision.
Variable Costs
Explanation / Answer
Cost per order = cost / no.of orders
Total Variable cost =$541880 + $193800 + $41100= $776780
Variable cost per order = 776780/20900 = $37.16
And if comany accepts an offer for 800 units then it charges $31 per order i.e excluding variable selling and administration expenses.
And cost per iorder if we exclude variable cost from total cost
= (776780 - 41100) / 20900
= $35.2
Hence it can be concluded that project should not be accepted as it is not able to cover material and labor cost.
31 is less than 35.2 cost per order.