Question

Thornton Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Thornton made 35,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.

Materials cost ($10 per unit × 20,000) $200,000
Labor cost ($9 per unit × 20,000) 180,000
Manufacturing supplies ($1.50 × 20,000) 30,000
Batch-level costs (20 batches at $2,000 per batch) 40,000
Product-level costs 80,000
Facility-level costs 145,000
Total costs $675,000
Cost per unit = $675,000 ÷ 20,000 = $33.75

Required

Sunny Motels has offered to buy a batch of 500 blankets for $23.50 each. Thorton's normal selling price is $45 per unit. Calculate the relevant cost per unit for the special order. Based on the preceding quantitative data, should Thorton accept the special order?

Answer 1

The offer will increase the value of the company.

Step-by-step explanation:

Giving the following information:

Materials cost $10 per unit

Labor cost $9 per unit

Manufacturing supplies $1.50

Batch-level costs $2,000

Sunny Motels has offered to buy a batch of 500 blankets for $23.50 each.

Because it is a special offer, we will not have into account the fixed costs:

Unitary cost=10 + 9 + 1.5 + (2,000/1,000)= $22.5

If the contribution margin is positive, the special offer should be accepted:

CM= selling price - unitary variable cost

CM= 23.5 - 22.5= $1

The offer will increase the value of the company.