Fineprint Company, owned and managed by John Johnson, prints high color brochures for its clients primarily in the central Virginia area. The facility is located at Charlottesville, Virginia. The company is currently operating at full capacity of 150,000 brochures per month. It employs one sales representative and one printing press operator, and also relies on temporary labor from time to time.
They do not have to be allocated to a product, department or any cost object. Indirect costs – These are not direct costs of the production department or items produced and hence need to be allocated to the department or product. Examples are taxes, administration and security costs.
Variable costs – are costs that change with the volume of output.
The cost of materials and labor are examples. Fixed costs – Fixed costs remain unchanged regardless of the change i
...n volume of output. Factory rent, insurance and property taxes are examples. Product costs - Manufacturer’s product costs are the direct materials, direct labor, and manufacturing overhead used in making its products. The product costs of direct materials, direct labor, and manufacturing overhead are also “inventoriable” costs, since these are the necessary costs of manufacturing the products.Period costs - are not a necessary part of the manufacturing process.
As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration. The period costs are reported as expenses in the accounting period in which they 1) best match with revenues, 2) when they expire, or 3) in the current accounting period. The theory used to arrive at th
decision for this case uses Breakeven Analysis. The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC).
A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative. In this case we use it to determine if it makes sense to accept the special order at the price of $10 per 100 brochures. AnalysisTo analyze this case we need to understand the profit and loss implications to the company, if this order were to be accepted. An assumption made here is that this special order is produced as a separate batch.
Manufacturing costs
- Direct material - variable Direct labor – variable Direct labor – fixed Manufacturing overhead – variable
- Manufacturing overhead - fixed $6,000 1,500 3,000 1,500 3,375 $0. 04 0. 01 - 0. 01 - $1000 250 3000 250 3375
- Total manufacturing costs$15,375$7,875
- Non-manufacturing costs
- Sales – variable
- Sales – fixed
- Corporate - fixed $1,500 1,875 3,750 $0.
- The unit selling price at 150,000 units is $0. The expected unit selling price for 25,000 units is $0.
Conclusion
As is evident the company would incur a loss of $11,000 if it were to accept the special order and print the brochures as a separate batch of 25,000. Also the price of $10 per 100 brochures is too low.The breakeven price for a volume of 25,000 is $54 per 100. So ideally the selling price has to be $0. 54 or more, per unit.
If the company plans
to accommodate the special order along with the current production, it may have to forego some of the existing production, since it is operating at full capacity (and assuming it cannot expand capacity in any way). This does not seem worth since there does not seem to be a potential for future business from this client. Hence my conclusion is that John Johnson should not accept the special order.
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