The manufacturing plant of Carilla Ltd. specializes in crafting specialized pieces for carnival. With a monthly production capacity of 15,000 pieces, the company currently manufactures and sells 11,000 pieces per month. Typically priced at $200 per piece, the company's cost breakdown for the ongoing production level is outlined below: Variable costs that vary with number of units produced Direct materials $ 440,000 Direct manufacturing labor 495,000 Variable costs (for setups, materials handling, quality control, etc.) that vary with number of batches, 220 batches * $500 per batch 110,000 Fixed Costs Fixed manufacturing costs 300,000 Fixed marketing costs 200,000 Total costs $1,545,000 Carilla has just received a special one-time-only order for 4,000 pieces at $150 per piece. Accepting the special order would not affect the company’s regular business. Carilla makes pieces for its existing customers in batch sizes of 50 pieces (220 batches 50 pieces per batch = 11,000 pieces). The special order requires Carilla to make the pieces in 40 batches of 100 each. Required: 1) Assume that monthly capacity is 15,000 pieces. Carilla is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $20 in the month in which the special order is being filled. They would argue that Carilla’s capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Carilla accept the special order under these conditions? Show your calculations.
The manufacturing plant of Carilla Ltd. specializes in crafting specialized pieces for carnival. With a monthly production capacity of 15,000 pieces, the company currently manufactures and sells 11,000 pieces per month. Typically priced at $200 per piece, the company's cost breakdown for the ongoing production level is outlined below:
Variable costs that vary with number of units produced
Direct materials $ 440,000
Direct manufacturing labor 495,000
Variable costs (for setups, materials handling, quality control, etc.)
that vary with number of batches, 220 batches * $500 per batch 110,000
Fixed Costs
Fixed
Fixed marketing costs 200,000
Total costs $1,545,000
Carilla has just received a special one-time-only order for 4,000 pieces at $150 per piece. Accepting the special order would not affect the company’s regular business. Carilla makes pieces for its existing customers in batch sizes of 50 pieces (220 batches 50 pieces per batch = 11,000 pieces). The special order requires Carilla to make the pieces in 40 batches of 100 each.
Required:
1) Assume that monthly capacity is 15,000 pieces. Carilla is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $20 in the month in which the special order is being filled. They would argue that Carilla’s capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Carilla accept the special order under these conditions? Show your calculations.
2) By reference to the above data:
a. Explain whether historical costs and future costs are relevant.
b. Differentiate between quantitative and qualitative aspects in the process of decision-making.
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