Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 36

Special Order Grant 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. Grant currently manufactures 40,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50 percent capacity. There will be no marketing costs on the special order. The sales manager of Grant wants to set the bid at $9 because she is sure that Grant will get the business at that price. Others on the executive committee of the firm object, saying that Grant would lose money on the special order at that price.

Units	40,000	60,000
Manufacturing costs
Direct materials	$ 80,000	$120,000
Direct labor	120,000	180,000
Factory overhead	240,000	300,000
Total manufacturing costs	$440,000	$600,000
Unit cost	$ 11	$ 10

Required

1. Why does the unit cost decline from $11 to $10 when production level rises from 40,000 to 60,000 units?

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2. Is the sales manager correct? What do you think the bid price should be?

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3. List some additional factors Grant should consider in deciding how much to bid on this special order.

Step 1 of 3

1.?The costs fall from $11 to $10 because of the fixed overhead costs which are the same at each level of production, so that the unit fixed costs decrease as production level increases.