It is currently January 2023 and Trial Industries Limited (Trial) manufactures batteries for the automobile sector, mainly for the North American ("NA") market. The company, located in Canada, has grown consistently over the past 10 years and, two years ago, decided to install a manufacturing system which was computer automated and it has significantly increased manufacturing capacity.

Trial is very proud of the quality of their batteries and each battery sold holds a 3 year warranty from the date of sale which is above the industry standard. Trial expects batteries to last, on average, 5 years from the date of manufacture.

Trial sells batteries in three main markets: (1) NA automobile manufacturers, (2) NA automotive replacement parts distributors, and (3) non-NA automobile manufacturers and replacement-part distributors. Sales are made to automobile manufacturers through a bidding process, and contracts are generally 5+ years and are not applicable for sales commissions. Sales to replacement-parts distributors are made by the sales team who use a standard price per battery. Sales staff are each paid a base salary and an additional 10 percent commission on the sales price of the order.

Trial currently has sales commitments/orders that would utilize 65 percent of its capacity over the 2023 year. Based on previous years results, it can expect an additional 10 percent capacity for short-term sales during 2023. Four potential contracts awaiting renewal and approval by the president are as follows:

1. Gem Motors is open for tenders on a new contract starting in 2023 for 21,000 batteries during 2023 and estimated to remain consistent for an additional 7 years. The standard costs for batteries for the contract is shown in appendix 1. The president believes the bid would be successful on the contract if it were to be submitted with a total price $3,800,000. This contract could strain the relation ship between Trial and Fudge, another NA automobile manufacturer, since Fudge is a direct competitor for Gem. Trial has done business with Fudge for over 8 years, however, the contract is coming up for renewal in 2026.

2. Canadian Auto Assembly ("CAA") has repeatedly purchased from Trial in the past, however, in relatively small batches up to 100 units at a time. CAA has requested a 20 percent discount on the list price for a large order of 36,000 batteries for delivery 3,000 increments each month in 2023 (see appendix 1 for additional information). Trial is not aware of the reasoning behind the large order and does not know the intention of CAA for the batteries (i.e. internal use or external sales).

3. A European exporter has approached Trial to manufacture and supply 32,000 batteries to its provided specifications at a price well below the normal list price for a standard Trial battery (see appendix 1 for additional information).The specifications are well below acceptable quality standards for Trial and would not be acceptable for North American Automobile manufacturers. Although, the batteries would not bear the logo for Trial, the president believes that they would be packaged by the exporter to resemble brand name products of Trial. This new order would have a sales price of $168 per battery and it would a save 10% for direct materials cost and save half an hour in labour per battery.

4. An Irish firm has offered to buy 45,000 modified batteries which have been in Trial's inventory for three years (see appendix 2). These batteries were left over from a special order for a customer who had declared bankruptcy before the batteries were delivered. The batteries were going to be sold for $225 in the special order, however, they were never paid for three years ago and thus never shipped. The current offer is $155 which is far lower than the original sale, however, the president is having doubts about Trial's ability to sell the batteries otherwise.

Trial uses a standard cost system under which total overhead is charged at a standard rate based on the factory's previous year's expected activity. The standards for 2023 were based on the expected 2022 activity of 3,150,000 machine hours which is about 75% of capacity. With the new automated equipment, about 60% of the overhead rate for 2023 represents fixed costs.

The president of Trial has contracted our firm, Bryanton & Student LLP to assess the required.

1. Prepare the calculations for each of the four potential contracts and determine the increase or decrease to contribution margin as a result.

2. Based on the remaining available machine hours, what contract should be accepted in order to maximize the operating income for Trial.

3. Indicate the qualitative factors that should be considered for each of the four contracts. Do these factors change your assessment in #2 above for which contracts should be accepted?

Appendix 1: Additional information

The 2023 standard costing approach used by Trial includes the costs as outlined below, based on the 2022 sales volume of 210,000 batteries. The standard markup for battery sales to the second and third main markets are based on these costs plus a 30% markup. Sales to the first and primary market (NA automobile manufacturers) do not have a set markup, the markup generally depends on the initial bid placed by the president.

	Cost per unit
Direct Materials	$75.00
Direct Labour (2.5 hours)	$30.00
Factory Overhead (15 hours each)	$75.00
Total manufacturing costs	$180.00

Appendix 2: Existing inventory

The batteries manufactured for the special order were produced before the computer automated manufacturing system was implemented. As a result, there is a higher cost associated with direct labour and a lower cost relating to factory overhead. At the time, 38% of the overhead rate was fixed.

	Cost per unit
Direct Materials	$50.00
Direct Labour (6 hours)	$69.00
Factory Overhead (12 hours each)	$60.00
Total manufacturing costs	$179.00