The Sommers Company, located in southern Wisconsin, manufactures several types of industrial valves and pipe fittings that

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The Sommers Company, located in southern Wisconsin, manufactures several types of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70% of capacity and is earning a satisfactory return on investment.
Management has been approached by Glasgow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Sommers' pressure valve; however, a fire in Glasgow's valve plant has shut down its manufacturing operations. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves, FOB destination.
Sommers' product cost for the pressure valve, based on currently attainable standards, is:
Direct materials .............................................................. $ 5.00
Direct labor .................................................................. 6.00
Applied factory overhead ................................................. 9.00
Total standard cost per unit ...............................................$20.00
Factory overhead is applied to production at the rate of $18 per standard direct labor hour. The overhead rate is comprised of the following components:
Variable factory overhead ................................................ $6.00
Fixed factory overhead:
Directly traceable to the product ....................................... 8.00
Allocated common cost .................................................. 4.00
Applied factory overhead rate ..........................................$18.00
Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5% and shipping expense of $1.00 per unit. However, the company will not pay sales commission on the Glasgow special order because it came directly to the company and no salespersons were involved in obtaining the order.
To determine the sales prices of its products, Sommers adds a 40% markup on product cost. This results in a $28 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $27 to maintain the company's market share.
Production management believes that it can handle the Glasgow order without disrupting its scheduled production. However, the order will require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs.
If management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glasgow each month for the next four months. Shipments will be made weekly, FOB destination.

Required:
(1) Prepare a differential cost analysis showing the impact of accepting the Glasgow Industries order.
(2) Calculate the minimum unit price that Sommers' management can accept for the Glasgow order without reducing net income.
(3) Identify factors than price that Sommers' management should consider before accepting the Glasgow order.
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Related Book For  answer-question

Cost Accounting

ISBN: 978-0759338098

14th edition

Authors: William K. Carter

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