Question

Required information [The following information applies to the questions displayed below.] Green Grow Inc. (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 25,000 one-hundred-pound bags per month, and it currently is selling 23,000 bags manufactured in 23 batches of 1,000 bags each. The firm just received a request for a special order of 5,600 one-hundred-pound bags of fertilizer for $145,000 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 $3,200 cost for GGI. The special order would be processed in two batches of 2,800 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 23,000 bags, per bag: Sales price Variable manufacturing costs Variable selling costs Fixed manufacturing costs Fixed marketing costs 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 5,600 bags. 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 break-even 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 break-even price determined in requirement 3.

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Answer 1

Answer is given below

1 Total relevant cost of filling this order $173,600 working notes: Variable manufacturing cost per unit Special order units $15 5,600 $84,000 $3,200 $87,200 One-time packing/delivery Total Cost of special order Opportunity cost-loss of existing sales Contribution Total Relevant cost $86,400 As per working below $173,600 Selling price Less: Variable manufacturing cost Variable selling cost Contribution per unit $24 Existing loss of sales units Opportunity cost 3,600 (in excess of 2,000 units) $86,400 Excess capacity (25,000-23,000) =2,000 units Sales loss = 5,600 -2,000 =3,600 units 2 Operating Income would be decreased by $28,600 Sales Total relevant cost of special order Decrease in Operating Income $145,000 $173,600 -$28,600 3 Break even selling price Total cost of special order Total units Unit selling price $173,600 5,600 $31.00 Current Situation Current Situation+ Special Order $1,012,000 $853,600 $173,600 so/ $1,012,000 $1,027,200 $345,000 $115,000 $375,000 $97,000 Sales Regular Special order Less: Variable cost Manufacturing Marketing Contribution Margin Less: Fixed Cost Manufacturing (23,000 * $14) Marketing (23,000 * $6) One-time packing/delivery Operating Income $460,000 $552,000 $472,000 $555,200 $322,000 $138,000 $322,000 $138,000 $3,200 $460,000 $92,000 $463,200 $92,000