Award Plus Company

Award Plus Co. manufactures medals for athletic events and other contests. Its manufacturing plant has the capacity to produce 10,000 medals each month; current monthly production is 7,500 medals. The company normally charges $225 per medal. Variable costs and fixed costs for the current activity level of 75 percent are shown in Appendix A. Award Plus managers bonus is based on an increase in revenue of 10% and ROI of 15%.

Award Plus has just received a special one-time order for 2,500 medals at $115 per medal. For this particular order, the company will incur the same variable and fixed costs as their regular medals except no variable marketing costs will be incurred. Cathy Senna, Senior Accounting Manager with Award Plus, has been assigned the task of analyzing this order.

Cathy has asked you, management accountant, for assistance. Cathy would like to know whether the company should accept or reject the special order and the current full manufacturing (i.e., prior to the special order) average cost per unit and the recalculated full manufacturing average cost per unit, including the effect of the special sales order. The prospective customer has suggested to increase the special order by 500 medals to 3,000 medals if the price can be further reduced. Cathy would like to know the minimum acceptable price for the 2,500 unit and the separate order of 500 additional units.

After examining the costs, Cathy suggested to her supervisor, Gerard LePenn, who is the controller, that they request competitive bids from vendors for the raw materials, since the current quote seems high. Gerald insisted that the prices are in line with those of other vendors and told her that she was not to discuss her observations with anyone else. Cathy later discovered that Gerald is a brother-in-law of the owner of the current raw materials supply vendor. How should Cathy try to resolve the ethical conflict arising out of the controller's insistence that the company avoid competitive bidding?

Required:

Prepare the analysis requested by Cathy Senna.

1

Current manufacturing capacity = Current production output = Normal sales price per unit =

Current Product Costs: Variable Costs:

Manufacturing: Labor

Material Marketing

Total Variable Costs

Fixed Costs:

Manufacturing Marketing

Total Fixed Costs

Total (i.e., Full Manufacturing) Cost

10,000 7,500 $225.00

$375,000 300,000 187,500

$275,000 225,000

2,500 $115.00

units per month units per month

Appendix A

$862,500

$500,000 $1,362,500

Information regarding the special sales order:

Number of units Offer price, per unit

2