Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 103

Accept special sales order? AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock show that manufacturing costs total $29.00 per lock. An analysis of this amount indicates that $16.75 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturing overhead. The normal selling price of this model is $38.75 per lock. A chain store has offered to buy 15,000 ZForce locks from AAA Lock at a price of $20.00 each to sell in a market that would not compete with AAA Lock’s regular business. AAA Lock has manufacturing capacity available and could make these locks without incurring additional fixed manufacturing overhead.

Required:

a. Calculate the effect on AAA Lock’s operating income of accepting the order from the chain store.

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b. If AAA Lock’s costs had not been classified by cost behavior pattern, is it likely that a correct special order analysis would have been made? Explain your answer.

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c. Identify the key qualitative factors that AAA Lock managers should consider with respect to this special order decision.

Step 1 of 3

a.

Revenue	$  20.00
Variable expense	(16.75)
Contribution margin per unit	$    3.25
Additional units sold if special order is accepted	15,000
Increase in contribution margin and operating income	$48,750