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

Exercise 40

Special Order; Strategy, International Williams Company, located in southern Wisconsin, manufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70 percent capacity and is earning a satisfactory return on investment.

Glasgow Industries Ltd. of Scotland has approached management with an offer to buy 120,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Williams’ pressure valve; however, a fire in Glasgow Industries’ valve plant has shut down its manufacturing operations. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers; the company is prepared to pay $21 each for the valves. Williams’ product cost for the pressure valve, based on current attainable standards, is

Direct materials	$ 6
Direct labor (0.5 hr per valve)	8
Manufacturing overhead (1/3 variable)	9
Total manufacturing cost	$23

Additional costs incurred in connection with sales of the pressure valve are sales commissions of 5 percent and freight expense of $1 per unit. However, the company does not pay sales commissions on special orders that come directly to management. Freight expense will be paid by Glasgow.

In determining selling prices, Williams adds a 40 percent markup to product cost. This provides a $32 suggested selling price for the pressure valve. The marketing department, however, has set the current selling price at $30 to maintain market share.

Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs.

If management accepts the order, Williams will manufacture and ship 30,000 pressure valves to Glasgow Industries each month for the next four months. Shipments will be made in weekly consignments, FOB shipping point.

Required

1. Determine how many additional direct labor-hours will be required each month to fill the Glasgow order.

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2. Prepare an analysis showing the impact on profit before tax of accepting the Glasgow order.

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3. Calculate the minimum unit price that Williams’ management could accept for the Glasgow order without reducing net income.

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4. Identify the strategic factors that Williams should consider before accepting the Glasgow order.

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5. Identify the factors related to international business that Williams should consider before accepting the Glasgow order.

Step 1 of 6

Fixed costs are costs which does not changes with change in level of production. Variable costs are costs which does changes with change in level of production.