Green Grow Incorporated (GGI) manufactures lawn fertilizer. Because of the product’s very high quality, GGI often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI’s operating capacity is 41,000 one-hundred-pound bags per month, and it currently is selling 39,000 bags manufactured in 39 batches of 1,000 bags each. The firm just received a request for a special order of 8,800 one-hundred-pound bags of fertilizer for $260,000 from APAC, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a one-time $6,000 cost for GGI. The special order would be processed in two batches of 4,400 bags each. (No incremental batch-level costs are anticipated. Most of the batch-level costs in this case are short-term fixed costs, such as salaries and depreciation.) 

The following information is provided about GGI’s current operations:

Sales and production cost data for 39,000 bags, per bag:

Sales price $ 46

Variable manufacturing costs 19

Variable selling costs 2

Fixed manufacturing costs 20

Fixed marketing costs 3

No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 8,800 bags. Assume that the $20.00 fixed manufacturing overhead cost per unit consists of facility-level costs ($17.00/unit at the 39,000-unit output level), with the remainder being setup-related (i.e., batch-level) costs. Assume that the setup-related costs increase in total with the number of batches produced and that the facility-level fixed costs do not vary in total, with either the number of units produced or the number of batches produced during a period.

Required:

1. What is the total relevant cost of filling this special sales order?

2. What would be the change in operating income if the special order is accepted?

3. What is the breakeven selling price per unit for the special sales order (i.e., what is the selling price that would result in a zero effect on operating income)?

4. Prepare comparative income statements, using the contribution format, for both the current situation and assuming the special order is accepted at the breakeven price determined in requirement 3.

Answer rating: 100% (QA)

1 The total relevant cost of filling this special sales order can be calculated as follows Variable manufacturing costs 19 x 8800 bags 167200 Fixed manufacturing costs batchlevel 3 x 2 batches 6 Deliv... View the full answer