Turf Care Limited (TCL) is a manufacturer of lawn fertilizer. TCL prides itself on the high quality of its fertilizer and as a result of continuous distinction in their products, they often receive special orders from agricultural groups. To ensure that each bag sold has the precise mix of components that was advertised for that type of fertilizer, each bag is carefully filled according to the product specifications. TCLs operating capacity is 28,000 one-hundred-pound bags per month, and it currently is selling 26,000 bags manufactured in 26 batches of 1,000 bags each. The company just received a request for a special order of 6,200 one-hundred-pound bags of fertilizer for $160,000 from ARG, a research organization. The production costs would be the same, but there would be no variable selling costs. Delivery and other packaging and distribution services would cause a one-time $3,500 cost for TCL. The special order would be processed in two batches of 3,100 bags each. (No incremental batch-level costs are anticipated. Most of the batch-level costs in this case are short-term fixed costs, such as salaries and depreciation.) See below for information about TCL's current operations:

Sales and production cost data for 26,000 bags, per bag:

Sales price $ 42

Variable manufacturing costs 15

Variable selling costs 2

Fixed manufacturing costs 14

Fixed marketing costs 8

No marketing costs would be associated with the special order. Because the order would be used in research and consistency is critical, ARG requires that TCL fill the entire order of 6,200 bags.

Required:

1. What is the total relevant cost of filling this special sales order?

2. What would be the change in operating income if the special order is accepted?

3. What is the break-even selling price per unit for the special sales order (i.e., what is the selling price that would result in a zero effect on operating income)?

4. Prepare comparative income statements, using the contribution format, for both the current situation and assuming the special order is accepted at the break-even price determined in requirement 3.

After TCL has accepted the special order, it finds that unexpected production delays will not allow it to supply all 6,200 units from its own plants and meet the promised delivery date. TCL can provide the same materials by purchasing them in bulk from a competing company. The materials would then be packaged in TCL bags to complete the order. TCL knows the competitors materials are very good quality, but it cannot be sure that the quality meets its own exacting standards. There is not enough time to carefully test the competitors product to determine its quality. What should TCL do? Specifically, list and discuss one ethical issue and one strategic issue associated with the decision, their implications on TCL's relationship with ARG, and your final recommendation on how TCL should approach the situation.