The Award Plus Company manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 10,000 medals each month. Current production and sales are 7,500 medals per month. The company normally charges $150 per medal. Cost information for the current activity level is as follows: Variable costs that vary with number of units produced
Direct materials ...................$ 262,500
Direct manufacturing labour ............. 300,000
Variable costs (for setups, materials handling, quality control, and so on) that vary with number of batches, 150 batches x $500 per batch* ........ 75,000
Fixed manufacturing costs ............... 275,000
Fixed marketing costs ................. 175,000
Total costs ..................... $1,087,500
Award Plus has just received a special one-time-only order for 2,500 medals at $100 per medal. Accepting the special order would not affect the company’s regular business. Award Plus makes medals for its existing customers in batch sizes of 50 medals (150 batches × 50 medals per batch × 7,500 medals). The special order requires Award Plus to make the medals in 25 batches of 100 each.
Required
1. Should Award Plus accept this special order? Show your calculations.
2. Suppose plant capacity were only 9,000 medals instead of 10,000 medals each month. The special order must either be taken in full or be rejected completely. Should Award Plus accept the special order? Show your calculations.
3. As in requirement 1, assume that monthly capacity is 10,000 medals. Award Plus 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. They would argue that Award Plus’s capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Award Plus accept the special order under these conditions? Show your calculations.