The manufacturing plant of Carilla Ltd. specializes in crafting specialized pieces for carnival. With a monthly production capacity of 15,000 pieces, the company currently manufactures and sells 11,000 pieces per month. Typically priced at $200 per piece, the company's cost breakdown for the ongoing production level is outlined below: • Variable costs that vary with number of units produced Direct materials Direct manufacturing labor $ 440,000 495,000 Variable costs (for setups, materials handling, quality control, etc.) that vary with number of batches, 220 batches * $500 per batch 110,000 Fixed Costs Fixed manufacturing costs Fixed marketing costs Total costs 300,000 200,000 $1,545,000
Carilla has just received a special one-time-only order for 4,000 pieces at $150 per piece.
Accepting the special order would not affect the company’s regular business. Carilla makes
pieces for its existing customers in batch sizes of 50 pieces (220 batches 50 pieces per batch =
11,000 pieces). The special order requires Carilla to make the pieces in 40 batches of 100 each.
Required
1. Should Carilla accept this special order? Show your calculations.
2. Suppose plant capacity were only 13,000 pieces instead of 15,000 pieces each month. The
special order must either be taken in full or be rejected completely. Should Carilla accept the
special order? Show your calculations.
3. As in requirement 1, assume that monthly capacity is 15,000 pieces. Carilla is concerned that
if it accepts the special order, its existing customers will immediately demand a price discount
of $20 in the month in which the special order is being filled. They would argue that Carilla’s
capacity costs are now being spread over more units and that existing customers should get the
benefit of these lower costs. Should Carilla accept the special order under these conditions?
Show your calculations.
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