Award Plus Co. manufactures medals for winners of athletic events and other contests. Its manufacturing plant has a capacity to produce 10,000 medals each month; current monthly production is 7,500 medals. The company normally charges $225 per medal. Total variable costs and fixed costs for the current activity level of 75% of capacity are as follows:

Current costs

Variable costs

Manufacturing

Material.................... $300,000

Labor.......................... 375,000

Marketing......................... 187,500

Total variable costs.............. $862,500

Fixed costs

Manufacturing................ $275,000

Marketing......................... 225,000

Total fixed costs................... $500,000

Total costs......................... $1,362,500

Award Plus has just received a special one-time order for 2,500 medals at $115 per medal. For this particular order, no variable marketing costs will be incurred. Cole Smith, a management accountant with Award Plus, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it. After examining the costs, Smith suggested to his supervisor, Gerald Jones, who is the controller, that they request competitive bids from vendors for the raw materials because the current cost seems high. Jones insisted that the prices are reasonable to told Smith that he is not to discuss his observations with anyone else. Smith later discovered that Jones is the brother-in-law of the owner of the current raw material supply vendor.

1. What is the current operating profit of Award Plus before accepting the special order? Is this operating profit relevant in the companys decision on whether to accept the special order? Why or why not?

2. What is the short-term effect on operating profit (to the nearest dollar) if Award Plus accepts the special order?

3. What is the breakeven selling price per unit for the special order, rounded to the nearest cent?

4. What are two qualitative factors that Cole Smith should consider in his analysis of the special order?

5. Explain how Cole Smith should try to resolve the ethical conflict arising out of the controllers insistence that the company avoids competitive bidding on raw materials.