Reference no: EM132944737
Problem - Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 20,000 units of one of its most popular products. Grant currently manufactures 40,000 units of this product at its plant. The plant is operating at 50 percent of capacity. There will be no marketing costs on this special order. The sales manager of Grant wants to set the bid price at $9 per unit because he is sure that Grant will get business at that price. Others on the management team of the firm object, saying that Grant would lose money on the special order at that price. Below is information on Grant's costs at different levels of production:
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Units
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40,000
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60,000
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Manufacturing costs
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Direct materials
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$80,000
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$120,000
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Direct labor 120,000 180,000
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Factory overhead
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240,000
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300,000
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Total manufacturing costs
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$440,000
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$600,000
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Cost per unit
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$11
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$10
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Requirements -
1. Explain why the cost per unit declines from $11 to $10 when the production level rises from 40,000 units to 60,000 units.
2. Will a $9 bid price increase Grant's profit? If yes, by how much? Show supporting computations.
3. List two qualitative factors that Grant should consider in deciding whether to accept this special order?
4. If the special order was for 50,000 units, why might Grant's bid price per unit be higher than the bid price per unit for an order of 20,000 units? It is only necessary to answer this question in words.
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