Flower Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 17,500 units of one of its most popular products. Flower currently manufactures 35,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50% capacity. There will be no marketing costs on the special order. The sales manager wants to set the bid at $13 because she is sure that Flower will get the business at that price. Others on the executive committee of the firm object, saying that Flower would lose money on the special order at that price. Units 35,000 52,500 Manufacturing costs: Direct materials $ 175,000 $ 262,500 Direct labor 210,000 315,000 Factory overhead 140,000 157,500 Total manufacturing costs $ 525,000 $ 735,000 Unit cost $ 15 $ 14 2. What is the relevant cost per unit? What do you think the minimum short-term bid price per unit should be? What would be the impact on short-term operating income if the order is accepted at the price recommended by the sales manager? 4. What would the total opportunity cost be if by accepting the special order the company lost sales of 5,600 units to its regular customers? Assume the preceding facts plus a normal selling price of $28 per unit.
Flower Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 17,500 units of one of its most popular products. Flower currently manufactures 35,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50% capacity. There will be no marketing costs on the special order. The sales manager wants to set the bid at $13 because she is sure that Flower will get the business at that price. Others on the executive committee of the firm object, saying that Flower would lose money on the special order at that price.
| Units | 35,000 | 52,500 |
|---|---|---|
| Direct materials | $ 175,000 | $ 262,500 |
| Direct labor | 210,000 | 315,000 |
| Factory |
140,000 | 157,500 |
| Total manufacturing costs | $ 525,000 | $ 735,000 |
| Unit cost | $ 15 | $ 14 |
2. What is the relevant cost per unit?
What do you think the minimum short-term bid price per unit should be?
What would be the impact on short-term operating income if the order is accepted at the price recommended by the sales manager?
4. What would the total opportunity cost be if by accepting the special order the company lost sales of 5,600 units to its regular customers? Assume the preceding facts plus a normal selling price of $28 per unit.
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