Exercise 11-22: Special Order; Opportunity Cost (Page 453) (30 minutes) [LO 11-1, 11-2]

Special Order; Opportunity Cost Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 20,000 units of one of its most popular products. Grant currently manufactures 40,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50 percent capacity. There will be no marketing costs on the special order. The sales manager of Grant wants to set the bid at $9 per unit because she is sure that Grant will get the business at that price. Others on the executive committee of the firm object, saying that Grant would lose money on the special order at that price.

Output Levels

Units 40,000 60,000

Manufacturing costs:

Direct materials $80,000 $120,000

Direct labor $120,000 $180,000

Factory overhead $240,000 $300,000

Total manufacturing costs $440,000 $600,000

Unit cost $11.00 $10.00

Required:

1-Why does the unit cost decline from $11 to $10 when production level rises from 40,000 to 60,000 units?

2-What would be the impact on short-term operating income if the order is accepted at the price recommended by the sales manager? What do you think the minimum (short-term) bid price should be?

3-List some additional factors Grant should consider in deciding how much to bid on this special order.

4-What would the total opportunity cost be if by accepting the special order the company lost sales of 5,000 units to its regular customers? Assume the preceding facts, plus a normal selling price of $20 per unit.