Question

	Cost per Bat	Total Costs
Direct materials	$14	$504,000
Direct manufacturing labor	5	180,000
Variable manufacturing overhead	1	36,000
Fixed manufacturing overhead	4	144,000
Variable selling expenses	3	108,000
Fixed selling expenses	4	144,000
Total costs	$31	$1,116,000

Runner

Corporation produces baseball bats for kids that it sells for

$37 each. At​ capacity, the company can produce 36,000 bats a year. The costs of producing and selling 36,000

bats are as​ follows:

Requirement 1. Suppose Runner is currently producing and selling 20,000

bats. At this level of production and​ sales, its fixed costs are the same as given in the preceding table. Musial Corporation wants to place a​ one-time special order for 16,000

bats at $26 each. Runner will incur no variable selling costs for this special order. Should Runner accept this​ one-time special​ order? Show your calculations.

Determine the effect on operating income if the order is accepted. ​(Enter decreases in operating income with parentheses or a minus​ sign.)

	Save Accounting Table...			+
	Copy to Clipboard...			+

Increase (decrease) in operating income if order is accepted

	Save Accounting Table...			+
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Runner should

Musial's special order because it

operating income by $

.

Requirement 2. Now suppose Runner

is currently producing and selling

36,000 bats. If Runner accepts Musial​'s offer it will have to sell 16,000 fewer bats to its regular customers.​ (a) On financial considerations​ alone, should Runner

accept this​ one-time special​ order? Show your calculations.​ (b) On financial considerations​ alone, at what price would Runner

be indifferent between accepting the special order and continuing to sell to its regular customers at $37

per​ bat? (c) What other factors should Runner consider in deciding whether to accept the​ one-time special​ order?​(a) On financial considerations​ alone, should Runner

accept this​ one-time special​ order? Show your calculations.

Determine the effect on operating income if the order is accepted. ​(Enter decreases in operating income with parentheses or a minus​ sign.)

	Save Accounting Table...			+
	Copy to Clipboard...			+

Increase (decrease) in operating income if order is accepted

	Save Accounting Table...			+
	Copy to Clipboard...			+

On financial consideration alone, Runner should				Musial's special order because it
operating income by $		.

​(b) On financial considerations​ alone, at what price would Runner

be indifferent between accepting the special order and continuing to sell to its regular customers at

$37

per​ bat?

	Save Accounting Table...			+
	Copy to Clipboard...			+

Runner would be indifferent between accepting the special order and continuing to sell to its regular customers at $37
per bat if the special selling price was $		.

​(c) What other factors should Runner

consider in deciding whether to accept the​ one-time special​ order?

A.

Can the company afford to adopt the special order price​ long-term or with other customers who may ask for price​ concessions?

B.

The effect on customer relationships by refusing sales from existing customers.

C.

Determine if the possibility of future​ long-term sales from Musial

seems likely.

D.

All of the above

Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

Part 1

Increase in operating income if order is accepted

$96000

Runner should

accept

Musial's special order because it

increses

operating income by $

$96000

.

Revenues from special order ($26´16,000 bats)	416000
Variable manufacturing costs ($20´16,000 bats)	(320000)
increase in operating income if order is accepted	96000

Direct materials cost per unit + Direct manufacturing labor cost per unit + Variable manufacturing overhead cost per unit = $14 + $5 + $1 = $20

Part 2 A

Decrease in operating income if order is accepted

$(128000)

On financial consideration alone, Runner should			reject	Musial's special order because it	decreases
operating income by $	128000	.

Revenues from special order ($26´16,000 bats)	416000
Variable manufacturing costs ($20´16,000 bats)	(320000)
Contribution margin foregone ((37-23)*16000)	(224000)
Decrease in operating income if order is accepted	(128000)

Direct materials cost per unit + Direct manufacturing labor cost per unit + Variable manufacturing overhead cost per unit + Variable selling expense per unit = $14 + $5 + $1 + $3 = $23

Part 2 B

Runner would be indifferent between accepting the special order and continuing to sell to its regular customers at $37
per bat if the special selling price was	$27.75	.

(320000+124000)/16000 = $27.75

Part 2 C

Option D

Runner may accept a loss on this special order willingly if there is any possibility of future long-term sales. Moreover, Runner should also consider the effect on customer relationships by refusing sales from existing customers. Besides Runner cannot afford to adopt the special order price long-term or with other customers who may ask for price concessions.