Marion Tools manufactures a variety of industrial hand tools sold primarily to domestic U.S. customers. Currently, the company is operating at 70 percent of capacity and is earning a satisfactory return on investment. Ula Industries, a Swiss based company, has approached Marion’s management with an offer to buy 120,000 monkey wrenches. Ula manufactures an almost identical monkey wrench, but an explosion in Ula’s tool manufacturing plant has forced the company to close its manufacturing operations. Ula needs the 120,000 monkey wrenches over the next four months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves. Marion’s product cost for the monkey wrench based on current attainable standards is:

Direct Material……………………………………………..$5

Direct Labor…………………………………………………6

Manufacturing overhead……………………………………9

Total Cost…………………………………………………$20

Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This overhead rate is made up of the following components:

Variable Factory Overhead…………………………………$6

Fixed Factory Overhead-Monkey Wrench Operation……….8

Fixed Factory Overhead-Allocated…………………………4

Applied Manufactured Overhead………………………...$18

Additional costs incurred in connection with sales of the monkey wrench include 5 percent sales commissions and $1 freight expense per unit. However, the company does not pay sales commissions on special orders that come directly to management. In determining selling prices, Marion adds a 40 percent markup to product cost, which provides a $28 suggested selling price for the monkey wrench. The marketing department, however, has set the current selling price at $27 to maintain market share.

Production management believes that it can handle Ula Industries’ order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month for supervision and clerical costs. If management accepts the order, Marion will manufacture and ship 30,000 monkey wrenches to Ula Industries each month for the next four months.

Prepare an incremental analysis showing the impact of accepting the Ula Industries’ order.

Calculate the minimum unit price that Marion Tools’ management could accept for the Ula Industries’ order without reducing net income.

Identify the factors, other than price, that Marion Tools’ should consider before accepting the Ula Industries’ order..

Write a Memo to Marion’s management with a recommendation indicating whether or not to accept the Ula Industries’ order. You should, at a minimum, use the Guide Questions to conduct your analysis and provide your recommendations.

Answer rating: 100% (QA)

The manufacturing overhead rate is 18 per standard direct labor hour and the standard product cost includes 9 of manufacturing overhead per pressure v... View the full answer