Gund Manufacturing produces Teddy Bears and sells them for $6.50 each. A foreign retailer has offered to purchase 25,000 Teddy Bears for $4.00 per Teddy. The current average manufacturing cost per Teddy is $4.50, $2.50 of variable cost and $2.00 of fixed cost. Gund has capacity to make 15,000 more bears. If they accept the special order, they will lose out on 10,000 normal sales, but it won’t hurt their brand or reputation. No variable non-manufacturing costs would be incurred by the special order. Should Gund Manufacturing accept the order?
What is the impact on income if Gund accepts the order?

B

Rama Corp makes machines used at golf courses. One of the parts in their
machine is Part #G25 that they currently make at their factory. A supplier has offered to make all
of their #G25 parts (4,000 per year) at a price of $26.50 each.
Based on an accounting report, the cost for Manufacture the #G25 parts are:

Per Unit Production Cost
$1.80 Direct Materials
$7.80 Direct Labor
$7.90 Variable Overhead
$2.30 Supervisor’s Salary
$6.90 Depreciation of Special Equipment
$6.60 Allocated General Equipment
$33.30 Total

The Special Equipment has no resale value or alternative use. The supervisor works on several
projects. Also, if Rama doesn’t make #G25, they can use the space and general equipment to increase
production of another product, which is supervised by the current supervisor. That would increase
the other product’s contribution margin by $13,000.

1 How much will profits increase (decrease) next year if they choose to purchase #G25 from
the supplier?

2 Should they purchase or manufacture #G25?