Farmingdale Industries Ltd. has been approached by a customer who wishes to purchase 48,000 units of its product at $57 per unit. The customer requires delivery within one month. The company has capacity to produce 352,000 units per month and has 7,000 units currently in stock. Sales to Farmingdale's regular customers are forecast at 328,000 units for the upcoming month. The sales manager has indicated that if the company accepts the special order, it would be able to recover 45% of the sales lost to regular customers. Units sold through normal distribution channels have a selling price of $77 per unit, and the gross margin earned on each unit is $26. Selling and administration costs total $20 per unit. A further analysis determined that the variable manufacturing costs of the regular units are $34 per unit with variable selling costs of $14 per unit. Because of the nature of the special order, the selling costs will be reduced to 10$ per unit, of which is all variable costs. Required 1 2. 3. Should Farmingdale accept the offer from the customer? What is the minimum price Farmingdale should charge for this order? What factors should be considered in pricing special orders?

Farmingdale Industries Ltd. has been approached by a customer who wishes to purchase 48,000 units of its product at $57 per unit. The customer requires delivery within one month. The company has capacity to produce 352,000 units per month and has 7,000 units currently in stock. Sales to Farmingdale's regular customers are forecast at 328,000 units for the upcoming month. The sales manager has indicated that if the company accepts the special order, it would be able to recover 45% of the sales lost to regular customers. Units sold through normal distribution channels have a selling price of $77 per unit, and the gross margin earned on each unit is $26. Selling and administration costs total $20 per unit. A further analysis determined that the variable manufacturing costs of the regular units are $34 per unit with variable selling costs of $14 per unit. Because of the nature of the special order, the selling costs will be reduced to 10$ per unit, of which is all variable costs. Required 1 2. 3. Should Farmingdale accept the offer from the customer? What is the minimum price Farmingdale should charge for this order? What factors should be considered in pricing special orders?

Name: Farmingdale Industries Ltd. has been approached by a customer who wis
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Description: Farmingdale Industries Ltd. has been approached by a customer who wishes to purchase 48,000 units ofits product at $57 per unit. The customer requires delivery within one month. The company has capacityto produce 352,000 units per month and has 7,00

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

Problem 6E: Elliott, Inc., has four salaried clerks to process purchase orders. Each clerk is paid a salary of...

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Elliott, Inc., has four salaried clerks to process purchase orders. Each clerk is paid a salary of 25,750 and is capable of processing as many as 6,500 purchase orders per year. Each clerk uses a PC and laser printer in processing orders. Time available on each PC system is sufficient to process 6,500 orders per year. The cost of each PC system is 1,100 per year. In addition to the salaries, Elliott spends 27,560 for forms, postage, and other supplies (assuming 26,000 purchase orders are processed). During the year, 25,350 orders were processed. Required: 1. Classify the resources associated with purchasing as (1) flexible or (2) committed. 2. Compute the total activity availability, and break this into activity usage and unused activity. 3. Calculate the total cost of resources supplied (activity cost), and break this into the cost of activity used and the cost of unused activity. 4. (a) Suppose that a large special order will cause an additional 500 purchase orders. What purchasing costs are relevant? By how much will purchasing costs increase if the order is accepted? (b) Suppose that the special order causes 700 additional purchase orders. How will your answer to (a) change?
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