Reference no: EM132787879

Super Scenary Inc. (SSI) manufactures lawn fertilizer. Because of the product's very high quality, SSI often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. SSI's operating capacity is 25,000 one-hundred-pound bags per month, and it currently is selling 23,000 bags manufactured in 23 batches of 1,000 bags each.

The following information is provided about SSI's current operations:
Sales and production cost data for 23,000 bags, per bag:

• The firm just received a request for a special order of 5,600 one-hundred-pound bags of fertilizer for $145,000 from AMEX, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a one-time $3,200 cost for SSI. The special order would be processed in two batches of 2,800 bags each. (No incremental batch-level costs are anticipated. Most of the batch-level costs in this case are short-term fixed costs, such as salaries and depreciation.) No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, AMEX requires that SSI fill the entire order of 5,600 bags.

Required:

Problem 1. What is the total relevant cost of filling this special sales order?

Problem 2. What would be the change in operating income if the special order is accepted?

Problem 3. What is the break-even selling price per unit for the special sales order (i.e., what is the selling price that would result in a zero effect on operating income)?

Problem 4. Prepare comparative income statements, using the contribution format, for both the current situation and assuming the special order is accepted at the break-even price determined in requirement 3.