Question: At Wagner Chocolates (where you are an intern management accountant), sales fluctuate widely. In February, the company could barely keep up with demand for chocolates, but sales have slowed dramatically in March. Wagner has been approached about a special order by the owner of a flower and gift shop in a nearby town. The flower shop would like to purchase 100 boxes of Wagner fine chocolates to sell in their shop. Because of the volume, they expect to get a special price. They have offered $11.00 per box, but have indicated that they may be willing to pay a bit more. Recall that Wagner normally sells chocolates for $20 per box. Cost information indicates that the total cost per box is $13.50. This cost is made up of $6 in direct materials, $5 in direct labor, $.50 of variable manufacturing overhead, $.50 of allocated fixed manufacturing overhead and $1.50 variable selling expense. Further analysis indicates that the entire fixed manufacturing overhead cost is made up of factory rent and utilities and is fixed. (The $.50 is the predetermined rate, calculated by dividing the estimated monthly fixed overhead of $400 by the normal monthly production of 800 boxes.) The selling expenses would be avoided entirely on this special order. Without the special order, Wagner expects to sell only 500 boxes of chocolate in March, which is less than 50% of capacity. Assignment:
Should Wagner accept the special order? Why or why not?
Prepare a condensed contribution income statement with the special order (selling 500 boxes at regular price and 100 boxes at $11.00 each) and one without the special order. What effect does the special order have on net income?
Suppose that the owner of the flower shop is willing to negotiate on price. What is the minimum price per box Wagner should charge? Justify your answer with calculations.
What other (qualitative) factors should Wagner consider before making this decision?