Dalton Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Dalton made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.

Dalton Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Dalton made 20,000 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

1. Sunny Motels has offered to buy a batch of 500 blankets for $23.50 each. Dalton'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 Dalton accept the special order?
2. Sunny offered to buy a batch of 1,000 blankets for $23.50 per unit, calculate the relevant cost per unit for the special order. Should Dalton accept the special order?
    

   Explanation

   a.
   The product-level and facility-level costs are not avoidable because they will be incurred regardless of whether the special order is accepted. The relevant (avoidable) costs for 500 blankets are:
    

   Production Cost for 500 Blankets
   Materials ($10 per unit × 500)	$	5,000
   Labor ($9 per unit × 500)		4,500
   Manufacturing supplies ($1.50 × 500)		750
   Batch-level costs (1 batch at $2,000)		2,000
   Total costs	$	12,250
   Cost per unit = $12,250 ÷ 500 = $24.50

   
   Dalton should reject the special order because the revenue generated from sales to Sunny ($23.50 per unit) is below the avoidable cost of production.
   
   b.
   Since the batch-level costs are fixed relative to the number of units within the relevant range of 1 to 1,000 units, the avoidable cost per unit will decrease when the number of units increases from 500 to 1,000. The supporting computations are shown below:
    

   Production Cost for 1,000 Blankets
   Materials ($10 per unit × 1,000)	$	10,000
   Labor ($9 per unit × 1,000)		9,000
   Manufacturing supplies ($1.50 × 1,000)		1,500
   Batch-level costs (1 batch at $2,000)		2,000
   Total costs	$	22,500
   Cost per unit = $22,500 ÷ 1,000 = $22.50

   
   Now the avoidable cost per unit is below the revenue per unit ($23.50) that will be generated by accepting the special order. Accordingly, the special order should be accepted. The decision changes from reject to accept the special order.
   
   
   
   

Thanks