Norton Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 20,000 units of one of its most popular products. Norton currently manufactures 40,000 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 of Norton wants to set the bid at $7 per unit because she is sure that Norton will get the business at that price. Others on the executive committee of the firm object, saying that Norton would lose money on the special order at that price. Units 40,000 Manufacturing Costs Direct Materials $ 90,000 Direct Labor 100,000 Factory Overhead 260,000* Total Manufacturing Cost $ 450,000 Unit Cost $ 11.25 *50% factory overhead is variable 1. Should Norton accept the invitation to bid? Explain. What would be the impact on shortterm operating income if the order is accepted at the price recommended by the sales manager? 2. Suppose that Norton’s distribution center at the warehouse is operating at full capacity and would need to add capacity (leasing additional warehouse) costing $6,000 for every 10,000 units to be packed and shipped. What do you think the minimum bid price for the special order? Explain 3. Based on the requirement no. 2, explain the relevant factors Norton should consider in deciding whether to bid in the special order.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Norton Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 20,000 units of one of its most popular products. Norton currently manufactures 40,000 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 of Norton wants to set the bid at $7 per unit because she is sure that Norton will get the business at that price. Others on the executive committee of the firm object, saying that Norton would lose money on the special order at that price.
Units 40,000
Direct Materials $ 90,000
Direct Labor 100,000
Factory
Total Manufacturing Cost $ 450,000
Unit Cost $ 11.25
*50% factory overhead is variable
1. Should Norton accept the invitation to bid? Explain. What would be the impact on shortterm operating income if the order is accepted at the price recommended by the sales manager?
2. Suppose that Norton’s distribution center at the warehouse is operating at full capacity and would need to add capacity (leasing additional warehouse) costing $6,000 for every 10,000 units to be packed and shipped. What do you think the minimum bid price for the special order? Explain
3. Based on the requirement no. 2, explain the relevant factors Norton should consider in deciding whether to bid in the special order.
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