costacctg13_sm_ch11

That is by accept ing the special order award plus

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Unformatted text preview: pt the one­time­only special order if it has no long­term implicat ions because accept ing the order increases Award Plus’ operating inco me by $50,000. If, however, accepting the special order would cause the regular customers to be dissat isfied or to demand lower prices, then Award Plus will have to trade off the $50,000 gain fro m accept ing the special order against the operating inco me it might lose fro m regular customers. 11­5 2. Award Plus has a capacit y of 9,000 medals. Therefore, if it accepts the special one­time order of 2,500 medals, it can sell only 6,500 medals instead of the 7,500 medals that it current ly sells to existing customers. That is, by accept ing the special order, Award Plus must forgo sales of 1,000 medals to its regular customers. Alternatively, Award Plus can reject the special order and cont inue to sell 7,500 medals to its regular customers. Award Plus’ operating inco me from selling 6,500 medals to regular customers and 2,500 medals under one­time special order follow: Revenues (6,500 ´ $150) + (2,500 ´ $100) 1 1 Direct materials (6,500 ´ $35 ) + (2,500 ´ $35 ) 2 2 Direct manufacturing labor (6,500 ´ $40 ) +(2,500 ´ $40 ) 3 Batch manufacturing costs (130 ´ $500) + (25 ´ $500) Fixed manufacturing costs Fixed market ing costs Total costs Operating inco me 1 $1,225,000 315,000 360,000 77,500 275,000 175,000 1,202,500 $ 22,500 $35 = $262, 500 7, 500 2 $40 = $300,000 7,500 3 Award Plus makes regular medals in batch sizes of 50. To produce 6,500 medals requires 130 (6,500 ÷ 50) batches. Accepting the special order will result in a decrease in operating inco me o f $15,000 ($37,500 – $22,500). The special order should, therefore, be rejected. A more direct approach would be to focus on the incremental effects––the benefits o f accept ing the special order of 2,500 units versus the costs of selling 1,000 fewer units to regular customers. Increase in operating inco me fro m the 2,500­unit special order equals $50,000 (requirement 1). The loss in ope...
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