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Course Contents LON-CAPA PROBLEMS PROBLEM #5 [SPECIAL ORDER DECISION...
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Wham Products, a maker of specialty products, is currently manufacturing and selling a product called Gory Goo. A discount department store, J-Mart, has made a one-time offer to
purchase 69,000 units of Gory Goo at $5.00 per unit for sale in J-Mart stores. Since Wham has enough excess capacity, management would naturally like to produce and sell the
additional units. But there is concern that $5.00 is below Gory Goo's unit manufacutring costs and well below it's normal $8.54 selling price.
Last year, Gory Goo's unit sales were 380,000 and its total manufacturing costs were:
Direct material $418,000
Direct labor 190,000
Variable overhead 342,000
Fixed Overhead 1,368,000
Total manufacturing $2,318,000
In addition to the manufactuning costs, there were selling and administrative expenses associated with Gory Goo. Variable selling and administrative expenses were $1.50 per unit, and
fixed selling and administrative expenses were $152,000.
For the special order, variable manufacturing costs per unit are expected to be the same as they were last year, but because the special order units are being sold directly to the J-Mart
chain, variable selling and administrative expenses are expected to be only $0.90 per unit. Fixed costs will not be affected.
Even though the special order units will have a different name and packaging, Wham's marketing group still believes that approximately 6,000 units from the special order will be sold
to customers who would normally purchase Gory Goo from Wham.
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