Management and Cost Accounting: Evaluating Special Order Impact

This case study examines a special order decision for Award Plus, analyzing its financial implications under various scenarios. Initially, the analysis suggests accepting the special order due to increased per-unit operating income. However, when plant capacity is limited, the special order becomes unfavorable, leading to a decrease in operating profit. Furthermore, the case considers the impact of a price discount demanded by existing customers, which renders the special order unacceptable due to a significant reduction in profit margin. The analysis involves detailed calculations of revenues, costs, and profitability under each scenario to determine the optimal decision for Award Plus, emphasizing the importance of considering capacity constraints and potential price discounts when evaluating special orders.

Running Head: MANAGEMENT AND COST ACCOUNTING
MANAGEMENT AND COST ACCOUNTING
Name of the Student
Name of the University
Author Note

1MANAGEMENT AND COST ACCOUNTING
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2:................................................................................................................3
Answer to Question 3:................................................................................................................3
References:.............................................................................................................................5

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Answer to Question 1: Award Plus should accept this special order due to the reason that
if it was manufacturing 7500 Models, then per unit operating income was 5 (Shigaev 2015).
Following is the calculations under normal situation:
Normal Scenario:-
Cost Per Unit Amount
0 7500
Revenues 150.00$ 1,125,000$
Direct Labour (40.00)$ (300,000)$
Direct Material (35.00)$ (262,500)$
Factory Overhead (10.00)$ (75,000)$
Fixed Marketing Cost (23.33)$ (175,000)$
Fixed Manufacturing Cost (36.67)$ (275,000)$
Total Expenses (145.00)$ (1,087,500)$
Operating Income 5.00$ 37,500$
Profit Margin 3.33%
Moreover, if they manufactures 10000 Models, which includes 2500 models of
special order then the operating profit was 8.75, which is profitable. Hence, special order is
acceptable and profitable for the company.
Second Scenario:-
Cost Per Unit Amount Cost Per Unit Amount Cost Per Unit Amount
Production Unit 7500 2500 10000
Revenues 150.00$ 1,125,000$ 100.00$ 250,000$ 150.00$ 1,375,000$
Direct Labour (40.00)$ (300,000)$ (40.00)$ (100,000)$ (40.00)$ (400,000)$
Direct Material (35.00)$ (262,500)$ (35.00)$ (87,500)$ (35.00)$ (350,000)$
Factory Overhead (10.00)$ (75,000)$ (5.00)$ (12,500)$ (8.75)$ (87,500)$
Fixed Marketing Cost (17.50)$ (131,250)$ (17.50)$ (43,750)$ (17.50)$ (175,000)$
Fixed Manufacturing Cost (27.50)$ (206,250)$ (27.50)$ (68,750)$ (27.50)$ (275,000)$
Total Expenses (130.00)$ (975,000)$ (125.00)$ (312,500)$ (128.75)$ (1,287,500)$
Operating Income 20.00$ 150,000$ (25.00)$ (62,500)$ 8.75$ 87,500$
Profit Margin 13.33% -25.00% 6.36%

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Answer to Question 2:
If the plant capacity were only 9000 medals instead of 10000 medals, then the
manufacturer have to reduce the normal productions to 6500, which will reduce the operating
profit per unit cost to $3, which is a loss and Award Plus will not be able to generate the
normal per unit cost as in first scenario. Hence, the special order must be rejected in full.
Calculations are shown below:
Third Scenario:-
Cost Per Unit Amount Cost Per Unit Amount Cost Per Unit Amount
Production Unit 6500 2500 9000
Revenues 150$ 975,000$ 100$ 250,000$ 136$ 1,225,000$
Direct Labour (40)$ (260,000)$ (40)$ (100,000)$ (40)$ (360,000)$
Direct Material (35)$ (227,500)$ (35)$ (87,500)$ (35)$ (315,000)$
Factory Overhead (10)$ (65,000)$ (5)$ (12,500)$ (9)$ (77,500)$
Fixed Marketing Cost (19)$ (126,389)$ (19)$ (48,611)$ (19)$ (175,000)$
Fixed Manufacturing Cost (31)$ (198,611)$ (31)$ (76,389)$ (31)$ (275,000)$
Total Expenses (135)$ (877,500)$ (130)$ (325,000)$ (134)$ (1,202,500)$
Operating Income 15$ 97,500$ (30)$ (75,000)$ 3$ 22,500$
Profit Margin 10.00% -30.00% 1.84%
Answer to Question 3:
Further, assuming the monthly capacity of award Plus is 10000 medals per month, its
existing customers demands a price discount of $10 in the month in which the special order is
filled. Customers argue that the Award Plus’s capacity is spread and existing customers will
get benefit of these lower cost. Award plus will not accept the special order in these
situations, it is due the fact that the operating income will decrease if discount will be
provided and profit margin will reduce drastically (Edmonds et al. 2013). Below is the
calculations to explain the situation.

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Fourth Scenario:-
Cost Per Unit Amount Cost Per Unit Amount Cost Per Unit Amount
Production Unit 7500 2500 10000
Revenues 150$ 1,125,000$ 100$ 250,000$ 138$ 1,375,000$
Less: Discount (10)$ (75,000)$ -$ -$ (8)$ (75,000)$
Net Sales Revenue 140$ 1,050,000$ 100$ 250,000$ 130$ 1,300,000$
Direct Labour (40)$ (300,000)$ (40)$ (100,000)$ (40)$ (400,000)$
Direct Material (35)$ (262,500)$ (35)$ (87,500)$ (35)$ (350,000)$
Factory Overhead (10)$ (75,000)$ (5)$ (12,500)$ (9)$ (87,500)$
Fixed Marketing Cost (18)$ (131,250)$ (18)$ (43,750)$ (18)$ (175,000)$
Fixed Manufacturing Cost (28)$ (206,250)$ (28)$ (68,750)$ (28)$ (275,000)$
Total Expenses (130)$ (975,000)$ (125)$ (312,500)$ (129)$ (1,287,500)$
Operating Income 10$ 75,000$ (25)$ (62,500)$ 1.25$ 12,500$
Profit Margin 7.14% -25.00% 0.96%

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References:
Edmonds, T.P., McNair, F.M., Olds, P.R. and Milam, E.E., 2013. Fundamental financial
accounting concepts. New York, NY: McGraw-Hill Irwin.
Shigaev, A., 2015. Accounting entries for activity-based costing system: The case of a
distribution company. Procedia Economics and Finance, 24, pp.625-633.