Problem
The Medal One Company manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 11,000 medals each month. Current production and sales are 10,000 medals per month. The company normally charges $250 per medal. Cost information for the current activity level is as follows:
Variable costs that vary with number of units produced
Direct materials $400,000
Direct manufacturing labor 350,000
Variable costs (for setups, materials handling, quality control, and so on)
that vary with number of batches, 50 batches x $800 per batch 40,000
Fixed manufacturing costs 275,000
Fixed marketing costs 150,000
Total costs $1,215,000
Medal One has just received a special? one-time-only order for 1,000 medals at $200 per medal. Accepting the special order would not affect the? company's regular business. Medal One makes medals for its existing customers in batch sizes of 200 medals (50 batches x medals per batch = 10,000 medals). The special order requires Medal One to make the medals in 8 batches of 125 medals.
1. Should Medal One accept this special order? Show your calculations.
2. Suppose plant capacity were only 10,500 medals instead of 11,000 medals each month. The special order must either be taken in full or be rejected completely. Should Medal One accept the special order? Show your calculations.
3. As in requirement 1, assume that monthly capacity is 11,000 medals. Medal One is concerned that it if accepts the special order, its existing customers will immediately demand a price discount of $15 in the month in which the special order is being filled. They would argue that Medal One's capacity should get the benefit of these lower costs. Should Mefal One accept the special order under these conditions? Show your calculations.