Chapter 11, Problem 34P

1.

To determine

Calculate the total fixed manufacturing overhead cost for the period and breakdown the total cost into its component parts.

Explanation of Solution

Calculate the total fixed manufacturing overhead cost for the period and breakdown the total cost into its component parts as follows:

$\begin{array}{c}\begin{array}{l}\text{Total manufacturing }\\ \text{cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Output level}\times \\ \text{Fixed manufacturing overhead cost per unit}\end{array}\right)\\ =20,000\text{ units}\times \$12\text{ per unit}\\ \text{=\$240,000}\end{array}$

Particulars	Amount ($)
Total back related overhead costs (b/f) $\left(\$240,000-\$180,000\right)$	$ 60,000
Add: Facility related overhead costs $\left(20,000\text{ units}\times \$9\text{ per unit}\right)$	$ 1,80,000
Total fixed manufacturing overhead cost	$ 2,40,000

Table (1)

2.

To determine

Calculate the relevant unit and total cost of the special order.

Explanation of Solution

Calculate the relevant unit and total cost of the special order as follows:

$\begin{array}{c}\begin{array}{l}\text{Total relevant cost }\\ \text{for special order}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Total out-of-pocket costs+}\\ \text{Contribution margin on lost sales}\end{array}\right)\\ =\$93,500(3)+\$51,000(6)\\ =\$144,500\end{array}$

Working note (1):

Calculate the number of batches need to fill special order.

$\begin{array}{c}\begin{array}{l}\text{Number of batches }\\ \text{need to fill special order}\end{array}\}\text{= }\frac{\text{Total number of units}}{\text{Batch size-special order}}\\ =\frac{5,000\text{ units}}{2,500}\\ =2\end{array}$

Working note (2):

Calculate the set-up cost per batch.

$\begin{array}{c}\text{Set-up cost per batch=}\frac{\text{Total batch-related overhead cost}}{\text{Total number of batches}}\\ =\frac{\$60,000}{20\text{ batches}}\\ =\$3,000\end{array}$

Working note (3):

Calculate the out-of-pocket costs.

Particulars	Amount ($)
Variable manufacturing cost $\left(5,000\text{ units}\times \$17\text{ per unit}\right)$	$ 85,000
Add: Incremental batch related overhead costs $\left(\text{2 batches}\times \$3,000\text{ per batch}\right)$ (refer working note (1) and (2)	$ 6,000
Add: One time delivery cost	$ 2,500
Total out-of-pocket cost	$ 93,500

Table (2)

Working note (4):

Calculate the number of lost sales units.

Particulars	Units	Units
Regular unit sales/month		20,000
Less: Regular unit sales after filling special sales order:
Total capacity	22,000
Less: Special-order sales	5,000	17,000
Lost sales units		3,000

Table (3)

Working note (5):

Calculate the batch level cost.

$\begin{array}{c}\text{Batch-level cost = }\left[\begin{array}{l}\left(\frac{\text{Number of units forgone (4)}}{\text{Batch size regular production}}\right)\times \\ \text{Batch level cost per batch}\end{array}\right]\\ =\frac{3,000}{1,000}\times \$3,000\\ =\$9,000\end{array}$

Working note (6):

Calculate the contribution margin on lost cost.

Particulars	Amount ($)
Sales $\left(3,000\text{ units}\times \$40\text{ per unit}\right)$	$ 1,20,000
Less: Variable cost $\left(3,000\text{ units}\times \left(\$17+3\text{ per unit}\right)\right)$	$ 60,000
Less: Batch level cost	$ 9,000
Contribution margin on lost sales	$ 51,000

Table (4)

3.

To determine

Explain the manner in which the special order would affect the short-term operating income of company G.

Explanation of Solution

Explain the manner in which the special order would affect the short-term operating income of company G as follows:

In this case, the total relevant cost ($144,500) is greater than the special order offer price ($130,000), and this difference would affect the short-term operating income of company G. It would decrease the operating income of company by $14,500$\left(\$144,500-\$130,000\right)$.