Required information
[The following information applies to the questionsdisplayed below.]
Green Grow Inc. (GGI) manufactures lawn fertilizer. Because ofthe product’s very high quality, GGI often receives special ordersfrom agricultural research groups. For each type of fertilizersold, each bag is carefully filled to have the precise mix ofcomponents advertised for that type of fertilizer. GGI’s operatingcapacity is 42,000 one-hundred-pound bags per month, and itcurrently is selling 40,000 bags manufactured in 40 batches of1,000 bags each. The firm just received a request for a specialorder of 9,000 one-hundred-pound bags of fertilizer for $290,000from APAC, a research organization. The production costs would bethe same, but there would be no variable selling costs. Deliveryand other packaging and distribution services would cause aone-time $5,500 cost for GGI. The special order would be processedin two batches of 4,500 bags each. (No incremental batch-levelcosts are anticipated. Most of the batch-level costs in this caseare short-term fixed costs, such as salaries and depreciation.) Thefollowing information is provided about GGI’s currentoperations:
| Sales and production cost data for 40,000 bags, perbag: |
| Sales price | $ | 47 | |
| Variable manufacturing costs | | 21 | |
| Variable selling costs | | 3 | |
| Fixed manufacturing costs | | 17 | |
| Fixed marketing costs | | 4 | |
|
No marketing costs would be associated with the special order.Because the order would be used in research and consistency iscritical, APAC requires that GGI fill the entire order of 9,000bags.
Required:
1. What is the total relevant cost of filling this special salesorder?
2. What would be the change in operating income if the specialorder is accepted?
3. What is the break-even selling price per unit for the specialsales order (i.e., what is the selling price that would result in azero effect on operating income)?
4. Prepare comparative income statements, using the contributionformat, for both the current situation and assuming the specialorder is accepted at the break-even price determined in requirement3.
