Reference no: EM132705010
Question - Porcupine Inc., an ice-cream company, is operating at 80 percent of its productive capacity, 10 million one-quart units. An ice-cream distributor from a different geographic region has offered to buy 2 million units of premium ice cream at $1.75 per unit, provided its own label can be attached to the product. Normal selling price is $2.50 per unit. Cost information for the premium ice cream follows:
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Total of 8,000,000 Units
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Unit Cost
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Variable costs:
|
|
|
Direct materials
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$7,600,000
|
$0.95
|
Direct labor
|
2,000,000
|
0.25
|
Packaging
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1,600,000
|
0.20
|
Commissions
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160,000
|
0.02
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Distribution
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240,000
|
0.03
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Other variable costs
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400,000
|
0.05
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Non-unit-level costs:
|
|
|
Purchasing ($8 x 40,000 purchase orders)
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320,000
|
0.04
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Receiving ($6 x 80,000 receiving orders)
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480,000
|
0.06
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Setting up ($8,000 x 50 setups)
|
400,000
|
0.05
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Fixed costs
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1,600,000
|
0.20
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Total Costs
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$14,800,000
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$1.85
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The special order will not require commissions or distribution (the buyer will pick up the order at Purple Porcupine's factory). The order will require 10,000 purchase orders, 20,000 receiving orders, and 13 setups. In addition, a one-time cost for the special order's label template will be required at $24,500.
Which alternative is more cost effective and by how much?
What if? Accepting the special order upset a regular customer who was considering expanding into the new geographical region and decided, then, to take their regular annual order of 2 million units of premium ice cream to another company? Which alternative would be better?