1. Demonstration Problem
Accounting
What the Numbers Mean 6e
Demonstration Problem
Chapter 16 – Exercise 7
Accept Special Sales Order?

2. Problem Definition
Integrated Circuit, Inc., (ICI) is presently operating at 50% of capacity and manufacturing 50,000 units of a patented electronic component. The cost structure of the component is as follows:
Raw materials $ per unit
Direct labor per unit
Variable overhead per unit
Fixed overhead $ 100,000 per year

3. Problem Definition
A Japanese firm has offered to purchase 30,000 of the components at a price of $6 per unit, FOB ICI’s plant. The normal selling price is $8 per component. This special order will not affect any of ICI’s “normal” business. Management calculated that the cost per component is $7, so it is reluctant to accept this special order.

4. Problem Requirements
Show how management came up with a cost of $7 per unit for this component.
Evaluate this cost calculation. Explain why it is or is not appropriate.
Should the offer from the Japanese firm be accepted? Why or why not?

5. Problem Solution
Show how management came up with a cost of $7 per unit for this component.
Calculate the cost per unit of manufacturing 50,000 component parts in the current year.

6. Problem Solution
Cost per unit
Direct material

7. Problem Solution
Cost per unit
Direct material $ 1.50
Given

8. Problem Solution
Cost per unit
Direct material $ 1.50
Direct labor

9. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Given

10. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Variable overhead

11. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Variable overhead
Given

12. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Variable overhead
Fixed overhead

13. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Variable overhead
Fixed overhead
Fixed overhead per unit = Total fixed overhead / Current units produced = $100,000 / 50,000 units

14. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Variable overhead
Fixed overhead

15. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Variable overhead
Fixed overhead
Cost per unit $ 7.00

16. Problem Solution Cost per unit Direct material $ 1.50
Direct labor
Variable overhead
Fixed overhead
Cost per unit $ 7.00
Solution: Cost per unit = $7.00

17. Problem Requirements
Show how management came up with a cost of $7 per unit for this component.
Evaluate this cost calculation. Explain why it is or is not appropriate.
Should the offer from the Japanese firm be accepted? Why or why not?

18. Problem Solution
The calculation includes an inappropriate unitization of fixed costs for decision making purposes. Unless the additional production of 30,000 units results in a movement to a new relevant range, total fixed expenses will not change.

19. Problem Requirements
Show how management came up with a cost of $7 per unit for this component.
Evaluate this cost calculation. Explain why it is or is not appropriate.
Should the offer from the Japanese firm be accepted? Why or why not?

20. Problem Solution
Should the offer from the Japanese firm be accepted? Why or why not?
Analyze the relevant costs associated with producing an additional 30,000 units by accepting the special offer of $6 per unit.

21. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price

22. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00

23. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:

24. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
The relevant costs of accepting this special offer are the incremental costs incurred by producing the additional 30,000 units.

25. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material

26. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material

27. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material
Direct labor

28. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material
Direct labor

29. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material
Direct labor
Variable overhead

30. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material
Direct labor
Variable overhead

31. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material
Direct labor
Variable overhead
Contribution margin per unit

32. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material
Direct labor
Variable overhead
Contribution margin per unit $ 1.00

33. Relevant Cost Analysis
Problem Solution
Relevant Cost Analysis
Selling price $ 6.00
Less relevant costs:
Direct material
Direct labor
Variable overhead
Contribution margin per unit $ 1.00
Note: Fixed costs are not relevant to this decision!

34. Problem Solution
The offer should be accepted because it would generate contribution of $1 per unit or $30,000 total contribution. Since ICI was operating with idle capacity, and unless a more profitable opportunity were available for the use of the idle capacity, accepting the offer would increase profits by $30,000.

35. Accounting What the Numbers Mean 6e David H. Marshall Wayne W. McManus
You should now have a better understanding of special pricing decisions.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele