Question

Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 17,500 units of one of its most popular products. Grant currently manufactures 35,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50% capacity. There will be no marketing costs on the special order. The sales manager of Grant wants to set the bid at $13 because she is sure that Grant will get the business at that price. Others on the executive committee of the firm object, saying that Grant would lose money on the special order at that price. 35,000 52,500 Units Manufacturing costs: Direct materials Direct labor Factory overhead Total manufacturing costs Unit cost $175,000 $262,500 , $525,000 $735,000 15 $ 14 Required

Answer 1

Grant Industries must analyze the incremental costs and revenues of a special order to decide if bidding at $13 per unit is profitable. This involves considering variable costs and understanding economies of scale, as fixed costs are already covered by their normal operations.

Step-by-step explanation:

The question revolves around the decision-making process in business operations pertaining to accepting a special order and involves understanding cost behavior, profitability analysis, and economies of scale. Grant Industries needs to determine if bidding at $13 per unit for a special order is profitable.

To make an informed decision, they must compare the incremental costs associated with producing an additional 17,500 units to the potential incremental revenues generated from the special order.

The fixed costs are likely covered by their current production, so they won't change. Therefore, the focus should be on variable costs. If the variable cost per unit is less than $13, the company may earn a profit on the special order. However, if the unit cost, which includes both variable and fixed costs, exceeds $13, then they would incur losses by accepting the bid.

Using provided examples of cost analysis at various production levels, it's essential to apply the concept to Grant's situation. For instance, the economies of scale may reduce the average cost of production when operating at higher capacities, potentially making the special order profitable even at a lower price point, assuming the scale does not exceed the threshold where economies of scale no longer apply.