Question

Even Pressure, Inc., is a Wisconsin-based manufacturer of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management does not believe it can economically capture more domestic market share, and has been seeking the best opportunity for international expansion.

Even Pressure’s management has been approached by Glass Cow Industries Ltd. of Scotland with an offer to buy 60,000 units of a particular pressure valve, product 303-DUN. Glass Cow needs the 60,000 units of 303-DUN over the next four (4) months and is prepared to pay $19.00 each for the valves.

Even Pressure’s standard cost card for 303-DUN, based on current attainable standards, is Direct materials $5.00 Direct labor 6.00 Manufacturing overhead 9.00 Total cost $20.00

Manufacturing overhead is applied to production at the rate of $18.00 per standard direct labor hour. This overhead rate is made up of the following components. Variable factory overhead $6.00 Fixed factory overhead – direct 8.00 Fixed factory overhead – allocated (common) 4.00 Applied manufacturing overhead rate $18.00

Even Pressure adds a 40% markup to full product cost when determining selling prices. This provides a $28.00 suggested selling price for product 303-DUN. The Marketing Department, however, has set the current selling price at $27.00 in order to maintain market share in the Midwest market.

Production management believes that it can handle the Glass Cow Industries order without disrupting scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs for compliance with international shipping regulations. Even-Pressure’s marginal tax rate, after deductions, is 30%.

If management accepts the order, Even Pressure will manufacture and ship 15,000 units of 303-DUN to Glass Cow Industries each month for the next four months. Shipments will be made in weekly consignments, FOB shipping point.

Prepare a recommendation for Even Pressure’s CEO regarding whether to accept this special order.

Answer 1

The manufacturing support cost driver rate is $18.00 per standard direct labor hour and the standard product cost includes $9.00 of manufacturing support per pressure valve. Accordingly, the standard direct labor hour per finished valve is hour ($9 / $18). Therefore, 15,000 units per month would require 7,500 direct labor hours.

The following costs are irrelevant to decision making

Shipping

Sales commission

Fixed manufacturing Support

The minimum unit price that sommers could accept without reducing its profits must cover variable costs plus the additional fixed costs.