(Special order decision) Adrian Pipe Company, located in southern Kentucky, man¬ ufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at 70 percent of capacity and is earning a satisfactory return on investment.

Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glascow Industries man¬ ufactures a valve that is almost identical to Adrian Pipe’s pressure valve; however, a fire in Glascow Industries’ valve plant has shut down its manufacturing oper¬ ations. Glascow needs the 120,000 valves over the next 4 months to meet com¬ mitments to its regular customers; the company is prepared to pay $19 each for the valves, FOB shipping point.

Adrian Pipe Company’s product cost, based on current attainable standards, for the pressure valve is

Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5 percent and freight expense of $1 per unit. How¬ ever, the company does not pay sales commissions on special orders that come directly to management.
In determining selling prices, Adrian Pipe Company adds a 40 percent markup to product cost. This provides a $28 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $27 to maintain market share.
Production management believes that it can handle the Glascow 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, 30,000 pressure valves will be manufac¬ tured and shipped to Glascow Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB shipping point.

a. Determine how many additional direct labor hours would be required each month to fill the Glascow Industries order.

b. Prepare an incremental analysis showing the impact of accepting the Glascow Industries order.

c. Calculate the minimum unit price that Adrian Pipe Company’s management could accept for the Glascow Industries order without reducing net income.

d. Identify the factors, other than price, that Adrian Pipe Company should con¬ sider before accepting the Glascow Industries order.
(CMA)
Ethics and Quality Discussion/.LO1

Transcribed Image Text:

Direct material Direct labor Manufacturing overhead Total cost $ 5 6 9 $20 Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This overhead rate is made up of the following components: Variable factory overhead Fixed factory overhead-direct Fixed factory overhead-allocated Applied manufacturing overhead rate 00 $ 6 8 4 $18