Treasure Island Beach Equipment, Inc., manufactures deluxe beach cabanas in Tampa, Florida. Its manufacturing plant has the capacity to produce 2,500 cabanas each month. Current monthly production is 1,875 cabanas. The company normally charges $525 per cabana. Variable costs and fixed costs for the current activity level of 75 percent of capacity are shown in the table below.

Management has just received a special one-time order for 625 cabanas at $300 per cabana. For this particular order, no variable marketing costs will be incurred. Samantha Peters, the assistant controller, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it. After examining the costs, Peters suggested to her supervisor, Katie Maas, who is the controller, that they request competitive bids from vendors for the raw material as the current quote seems high. Maas insisted that the prices are in line with other vendors and told her that she was not to discuss her observations with anyone else. Peters later discovered that Maas is a sister-in-law of the owner of the current raw-material supply vendor.

Current Product Costs (at 75% of Capacity)

Variable costs:

Manufacturing:

Direct labor................................................................................$281,250

Direct material........................................................................... 196,875

Marketing................................................................................... 140,625

Total variable costs....................................................................$618,750

Fixed costs:

Manufacturing..........................................................................$206,250

Marketing................................................................................. 131,250

Total fixed costs......................................................................$337,500

Total costs...............................................................................$956,250

Variable cost per unit.............................................................. $330

Fixed cost per unit................................................................... 180

Average unit cost.................................................................... $510

Required:

1. Identify and explain the costs that will be relevant to Peters’ analysis of the special order being considered by Treasure Island Beach Equipment, Inc.

2. Determine if management should accept the special order. In explaining your answer, compute the new average unit cost for

(a) current monthly production alone;

(b) the special order alone; and

(c) total combined production.

3. Discuss any other considerations that Peters should include in her analysis of the special order.

4. What steps could Peters take to resolve the ethical conflict arising out of the controller’s insistence that the company avoid competitive bidding?

5. Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (2). Show how the solution will change if the sales price is $535 per cabana.

(CMA, adapted)