Question

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 10,000 medals per month. The company normally charges $ 300 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.................... 450,000
Variable costs (for setups, materials handling, quality control, etc.) that
vary with number of batches, 200 batches *$ 1,500 per batch..... 300,000
Fixed manufacturing costs ................... 250,000
Fixed marketing costs ................... 50,000
Total costs ........................ $ 1,650,000
Medal Plus has just received a one- time- only special order for 2,000 medals at $ 250 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 (200 batches * 50 medals per batch = 10,000 medals). The special order requires Medal Plus to make the medals in 40 batches of 50 each.
Required
1. Should Medal Plus accept this special order? Show your calculations.
2. Suppose plant capacity were only 11,000 medals instead of 12,000 medals each month. Medal Plus must accept or reject the special order in full. Should Medal Plus accept the special order? Show your calculations.
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 $ 20 in the month in which the special order is being filled. Existing customers would argue that Medal Plus’ capacity costs are now being spread over more units and that they should get the benefit of these lower costs. Should Medal Plus accept the special order under these conditions? Show your calculations.



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  • CreatedJanuary 15, 2015
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