Question

Baxter, Inc. manufactures high-end copiers used in businesses and sells their copiers directly to businesses through in-house sales representatives. The following are the budgeted costs for the year for the expected production of 3,000 copiers; actual costs to date have been tracking very close to budget:

Unit-level costs:
Material costs (3,000 units x $120)	$360,000
Labor costs (3,000 units x $ 95)	$285,000
Manufacturing overhead (3,000 units x $12.50)	$ 37,500
Total Unit-Level Costs (3,000 units x $227.50)	$682,500
Batch-level costs (15 batches x $1,800 per batch)	$ 27,000
Product-level costs	$77,750
Facility-level costs:
Segment-level costs	$105,000
Allocated-corporate level costs	$130,000
Total Facility-level costs	$235,000
Total Expected Cost	$1,022,250
Cost per unit: $1,022,250 ÷ 3,000 units = $340.75

Office Leasing has approached Baxter, Inc. and has offered to buy 200 copiers directly from Baxter, Inc. at a price of $295.00 each. Baxter Inc.’s normal selling price is $495.00 per copier. If Baxter, Inc. were to accept this special order, they would produce these 200 copiers using one additional batch run.

Required:

1. Identify the costs that are relevant to this business decision.

2. Should Baxter, Inc. accept the special order? Support your answer showing appropriate computations, including the amount of additional profit or loss that would result from accepting this special offer.

Answer 1

1. Relevant costs:

Unit-level costs:

Material costs

Labor costs

Manufacturing overhead

Batch-level costs:

The product-level costs and facility-level costs are irrelevant since they would remain unchanged whether or not the special order is accepted.

2.

	Per Unit	Total
Sales price	295.00	59000
Unit-level costs:
Material costs	120.00	24000
Labor costs	95.00	19000
Manufacturing overhead	12.50	2500
Batch-level costs		1800
Total costs		47300
Additional profit (loss) on special order $		11700

Baxter Inc. should accept the special order from Office Leasing since it would result in an additional profit of $11700.