Reference no: EM132744480

Question - Special order, activity-based costing

The Award One Company manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 12,000 medals each month. Current production and sales are 10,000 medals per month. The company normally charges $250 per medal. Cost information for the current activity level is as follows:

Variable costs that vary with number of units produced:

Direct materials: $600,000

Direct manufacturing labor $300,000

Variable costs (for setups, materials handling, quality control, etc.) that vary with number of batches, 100 batches x $1,250 per batch $125,000

Fixed manufacturing costs $100,000

Fixed marketing costs: $50,000

Total costs: $1,175,000

The Award One has just received a special one-time-only special order for 2,000 medals at $225 per medal. Accepting the special order would not affect the company's regular business. Award One makes medals for its existing customers in batch sizes of 100 medals (100 batches x 100 medals per batch = 10,000 medals). The special order requires Award One to make the medals in 80 batches of 25 each.

Required -

1. Should Award One accept this special order? Show your calculations.

2. Suppose plant capacity were only 11,000 medals instead of 12,000 medals ach month. Award One must accept or reject the special order in full. Should Award One accept the special order? Show your calculations.

3. As in requirement 1, As in requirement 1, assume that monthly capacity is12,000 medals. Award One is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $10 in the month in which the special order is being filled. Existing customers would argue that Award One's capacity costs are now being spread over more units and that they should get the benefit of these lower costs. Should Award One accept the special order under these conditions? Show your calculations.