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Aria Ltd produces medals for winners of athletic events and has the capacity to produce 10,000 units each month. Current production and sales are 7,500 units per month. The company normally charges

Aria Ltd produces medals for winners of athletic events and has the capacity to produce 10,000 units each month. Current production and sales are 7,500 units per month. The company normally charges $150 per unit. Cost information for the current activity level is as follows:

Aria Ltd has just received a special one‐time‐only order for 2,500 medals at $100 per unit. Accepting the special order would not affect the company’s regular business. Aria Ltd makes medals for its existing customers in batch sizes of 50 medals (150 batches X 50 medal per batch =7,500 medals).

The special order requires Aria Ltd to make the medals in 25 batches of 100 each.

(a) Should Aria Ltd accept this special order? Present your comment briefly and show

your calculation

(b) Suppose plant capacity were only 9,000 medals instead of 10,000 medals each

month. The special order must either be taken in full or be rejected completely.

Should Aria Ltd accept this special order? Present your comment briefly and show

your calculation.

Cost

 

Variable costs that vary with number of units produced

 

Direct materials

$262,500

Direct labour

$300,000

Variable costs that vary with number of batches (150 batches X $500)

$75,000

Fixed manufacturing costs

$275,000

Fixed marketing costs

$175,000

 

$1,087,500

Aug 09 2021 View more View Less

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