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 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 Variable manufacturing costs Variable selling costs Fixed manufacturing costs Fixed marketing costs Onam 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.

Answer 1

Answer with working notes is given below

2 Operating Income would be decreased by $83,200 working notes: Sales Total cost of special order Decrease in Operating Income $260,000 $343,200 -$83,200 $19 Variable manufacturing cost Special order units Total cost One-time packing/delivery Total Cost of special order Opportunity cost-loss of existing sales Contribution Total Cost 8,800 $167,200 $6,000 $173,200 $170,000 As per working below $343,200 Selling price Less: Variable manufacturing cost Variable marketing cost Contribution per unit $25 Existing loss of sales units Opportunity cost 6,800 (in excess of 2,000 units) $170,000 Excess capacity (41,000-39,000) =2,000 units Sales loss = 8,800 -2,000 =6,800 units 3 Break even selling price Total cost of special order Total units Unit selling price $343,200 8,800 $39.00 Current Situation Current Situation+ Special Order $1,794,000 $1,481,200 $343,200 $1,794,000 $1,824,400 $741,000 $78,000 $779,000 $64,400 Sales Regular Special Less: Variable cost Manufacturing Marketing Contribution Margin Less: Fixed Cost Manufacturing (39,000 * $20) Marketing (39,000 * $3) One-time packing/delivery Operating Income $819,000 $975,000 $843,400 $981,000 $780,000 $117,000 $780,000 $117,000 $6,000 $897,000 $78,000 $903,000 $78,000