Green Grow Inc. (GGI) manufactures lawn fertilizer. Because of the product's very high quality, GGI often receives special orders from agricultural research groups. For each type of fertilizer sold, each bag is carefully filled to have the precise mix of components advertised for that type of fertilizer. GGI's operating capacity is 22,000 one-hundred-pound bags per month, and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000 one-hundred-pound bags of fertilizer for $130,000 from APAC, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a one-time $2,500 cost for GGI. The special order would be processed in two batches of 2,500 bags each. (No incremental batch-level costs are anticipated.) The following information is provided about GGI's current operations:

Sales and production cost data for 20,000 bags, per bag:

Sales price ................................................. $40

Variable manufacturing costs ........................... 17

Variable selling costs ...................................... 3

Fixed manufacturing costs .............................. 12

Fixed marketing costs .................................... 4

No marketing costs would be associated with the special order. Since the order would be used in research and consistency is critical, APAC requires that GGI fill the entire order of 5,000 bags.

Required

1. What is the total relevant cost of filling this special-sales order?

2. What would be the change in operating income if the special order is accepted?

3. What is the breakeven selling price per unit for the special sales order (that is, what is the selling price that would result in a zero effect on operating income)?

4. Prepare comparative income statements, contribution format, for both the current situation and assuming the special order is accepted at the breakeven price determined in requirement 3 above.

5. Suppose that after GGI accepts the special order, it finds that unexpected production delays will not allow it to supply all 5,000 units from its own plants and meet the promised delivery date. It can provide the same materials by purchasing them in bulk from a competing fi rm. The materials would then be packaged in GGI bags to complete the order. GGI knows the competitor's materials are very good quality, but it cannot be sure that the quality meets its own exacting standards. There is not enough time to carefully test the competitor's product to determine its quality. What should GGI do?