Smith Quilting Company makes blankets that are marketed through a variety of department stores. The production process is a batch production process and the maximum number of blankets per batch is 1,500 (Batch size can be less than 1,500). The budgeted cost of production for the current year is given below:

Budgeted Production quantity

20,000

blankets

Budgeted Number of batches

20

batches

Unit level costs

Direct Materials Cost @

$26.00

per unit

$520,000

Direct Labor cost @

$22.00

per unit

$440,000

Manufacturing supplies@

$3.00

per unit

$60,000

Batch level costs @

$3,000.00

per batch

$60,000

Product level costs

$320,000

Facility level costs

$390,000

Total costs

$1,790,000

Cost per unit

$ 1,790,000

20,000

$89.50

Usual selling price per blanket

$91.00

per unit

Required:

Part A)

Rao Motels has approached Smith for a one time business with the following proposition.

Special order quantity

500

blankets

Purchase price

$52.00

per unit

Calculate the relevant cost of this special order (from Rao Motels) to Smith (3 points).

Calculate the profit impact of this order to Smith. Should Smith accept this offer? Why or Why not? (2 points)

Assume that Smith has enough capacity to execute the special order in one batch.

Part B)

Independent of your answer to Part (A), consider the following one time business proposal from Rao Motels to Smith.

Special order quantity

1500

blankets

Purchase price

$54.00

per unit

Calculate the relevant cost of this special order (from Rao Motels) to Smith (3 points).

Calculate the profit impact of this order to Smith. Should Smith accept this offer? Why or Why not? (2 points)

Assume that Smith has enough capacity to execute the special order in one batch.