Suppose you have been asked to advise for Garner Company, a production company that has had a policy of producing to meet customer demand. As a result, finished goods inventory is minimal, and for the most part, units produced equal units sold.

Recently, Garners industry entered a recession, and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that at least cover its variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase the overall profitability of the company. Toward that end, the president of Garner Company implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. To help implement the policy, Garners controller developed the following cost formula:

Direct Materials Usage = $94X

Direct Labor Usage = $16X

Overhead = $350,000 (fixed cost) + $80X

Selling Costs = $50,000 (fixed cost) + $7X

(where X = number of units)

(This assignment is derived from Case 3-70 at the end of Chapter 3.)

Scenario 1:

Suppose that Garner has an opportunity to accept an order for 20,000 units at a price of $212 per unit. Each unit uses 1 direct labor hour for production.

• Calculate the total variable cost for this order.
• Calculate the total unit variable cost for this order. (Total variable cost / 20,000 units)
• Identify if this is above or below the unit price of $212 per unit price and explain whether Garner should accept or reject this order.

Scenario 2:

Now assume that a multiple regression equation has been developed for the variable overhead costs (Y) to replace the $80X that was used above. The new calculation is based on the following:

Y = $85X1 + $5,000X2 + $300X3

X1 = Direct Labor Hours per Unit

X2 = Number of Setups

X3 = Engineering Hours

(Hint: Direct Materials, Direct Labor, and Variable Selling Costs are the same)

Assume that the 20,000 unit order requires 1 hour of direct labor per unit, 12 setups, and 500 engineering hours.

• Calculate the total variable cost for this order.
• Calculate the total unit variable cost for this order. (Total variable cost / 20,000 units)
• Identify if this is above or below the unit price of $212 per unit price and explain whether Garner should accept or reject this order.
• Explain whether or not there is any other information about cost behavior that you would like to have to make your decision.