Question

Special order, activity-based costing.(CMA, adapted) The Medal Plus 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 9,000 medals per month. The company normally charges $200 per medal. Cost information for the current activity level is as follows:
Variable costs (vary with units produced):
Direct materials ................. $ 360,000
Direct labour .................. 405,000
Variable costs (vary with number of batches):
Setups, materials handling, quality control ...... 126,000*
Fixed manufacturing costs ............. 325,000
Fixed marketing costs .............. 224,000
Total costs ................... $1,440,000
Medal Plus has just received a special one-time-only order for 2,500 medals at $168 per medal. Accepting the special order would not affect the company's regular business. Medal Plus makes medals for its existing customers in batch sizes of 50 medals (180 batches x 50 medals per batch = 9,000 medals). The special order requires Medal Plus to make the medals in 25 batches of 100 each.
REQUIRED
1. Should Medal Plus accept this special order? Explain briefly.
2. Suppose plant capacity was only 10,000 medals instead of 12,000 medals each month. The special order must either be taken in full or rejected totally. Should Medal Plus accept the special order?
3. As in requirement 1, assume that monthly capacity is 12,000 medals. Medal Plus is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $11 in the month in which the special order is being filled. They would argue that Medal Plus's capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Medal Plus accept the special order under these conditions? Show all calculations.


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  • CreatedJuly 31, 2015
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