Reference no: EM132611423
Turf Care Limited (TCL) is a manufacturer of lawn fertilizer. TCL prides itself on the high quality of its fertilizer and as a result of continuous distinction in their products, they often receive special orders from agricultural groups. To ensure that each bag sold has the precise mix of components that was advertised for that type of fertilizer, each bag is carefully filled according to the product specifications. TCL's operating capacity is 33,000 one-hundred-pound bags per month, and it currently is selling 31,000 bags manufactured in 31 batches of 1,000 bags each. The company just received a request for a special order of 7,200 one-hundred-pound bags of fertilizer for $200,000 from ARG, 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 $4,400 cost for TCL. The special order would be processed in two batches of 3,600 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.) See below for information about TCL's current operations:
Sales and production cost data for 31,000 bags, per bag:
Sales price $46
Variable manufacturing costs 12
Variable selling costs 3
Fixed manufacturing costs 21
Fixed marketing costs 7
No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, ARG requires that TCL fill the entire order of 7,200 bags.
Required:
Question 1. What is the total relevant cost of filling this special sales order?
Question 2. What would be the change in operating income if the special order is accepted?
Question 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)?
Question 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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