The management of Garland Inc. is considering whether or not to accept a special sales order for 500
Units of a product at a sales price of $900 per unit. Management has been provided the following data
Regarding the manufacturing and selling costs per unit:
$$\begin{array} { | l | r | }
\hline \text { Direct materials } & \$ 225 \
\hline \text { Direct labor } & \$ 195 \
\hline \text { Variable manufacturing overhead } & \$ 105 \
\hline \text { Fixed manufacturing overhead } & \$ 119 \
\hline \text { Variable selling costs } & \$ 75 \
\hline \text { Fixed selling costs } & \$ 25 \
\hline
\end{array}$$ Management has been informed that variable selling costs pertaining to the special sales order will be
Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will
Be lost; the sales to regular customers create a contribution margin of $500 per unit. Should Garland's
Management accept the special sales order?

Question

The management of Garland Inc. is considering whether or not to accept a special sales order for 500
Units of a product at a sales price of $900 per unit. Management has been provided the following data
Regarding the manufacturing and selling costs per unit:
$$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 225 \
\hline \text { Direct labor } & \$ 195 \
\hline \text { Variable manufacturing overhead } & \$ 105 \
\hline \text { Fixed manufacturing overhead } & \$ 119 \
\hline \text { Variable selling costs } & \$ 75 \
\hline \text { Fixed selling costs } & \$ 25 \
\hline
\end{array}$$ Management has been informed that variable selling costs pertaining to the special sales order will be
Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will
Be lost; the sales to regular customers create a contribution margin of $500 per unit. Should Garland's
Management accept the special sales order?

Quizplus · Accepted Answer

To determine if the special sales order should be accepted, we calculate the impact on operating income. First, calculate the variable costs per unit for the special order:- Direct materials: $225- Direct labor: $195- Variable manufacturing overhead: $105- Variable selling costs (reduced by 20%): $75 - ($75 * 20%) = $60Total variable costs per unit = $225 + $195 + $105 + $60 = $585Sales price per unit = $900Contribution margin per unit = $900 - $585 = $315For 500 units, total contribution margin = 500 * $315 = $157,500However, 250 units of sales to regular customers will be lost, which have a contribution margin of $500 per unit. The total lost contribution margin = 250 * $500 = $125,000Net increase in operating income = $157,500 - $125,000 = $32,500Therefore, accepting the special sales order will increase operating income by $32,500.

The Management of Garland Inc Management Has Been Informed That Variable Selling Costs Pertaining to to Accept