Winner?s Circle, Inc. manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 10,000 medals each month. Current monthly production is 7,500 medals. The company normally charges $175 per medal. Variable costs and fixed costs for the current activity level of 75 percent of capacity are as follows:
Direct labor ............ $ 375,500
Direct material .......... 262,500
Marketing .............. 187,500
Total variable costs ........... $ 825,000
Manufacturing .......... $275,000
Marketing ............. 175,000
Total fixed costs .......... $450,000
Total costs ............. $1,275,000
Variable cost per unit ........ $ 110
Fixed cost per unit ......... 60
Average unit cost .......... $ 170
Winner?s Circle has just received a special one-time order for 2,500 medals at $100 per medal. For this particular order, no variable marketing costs will be incurred. Cathy Donato, a management account that with Winner?s Circle, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it. After examining the costs. Donato suggested to her supervisor, Gerard Le Penn, who is the controller, that they request competitive bids from vendors for the raw material as the current quote seems high. Le Penn insisted that the prices are in line with other vendors and told her that she was not to discuss her observations with anyone else. Donato later discovered that Le Penn is a brother-in law of the owner of the current raw-material supply vendor.
1. Identify and explain the costs that will be relevant to Cathy Donato?s analysis of the special order being considered by Winner?s Circle, Inc.
2. Determine if Winner?s Circle should accept the special order. In explaining your answer, compute both the new average unit cost and the incremental unit cost for the special order.
3. Discuss any other considerations that Donato should include in her analysis of the special order.
4. What steps could Donato take to resolve the ethical conflict arising out of the controller?s insistence that the company avoid competitive bidding?
This question was answered on: Jul 11, 2017
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