Fineprint

Cost Accounting

FinePrint Company Case Analysis

Issue: John Johnson first must decide whether or not he is going to (1) accept Abbie Jenkins’ one-time special order. He also must consider and decide whether or not to (2) outsource some of his printing to SmallPrint Company and (3) accept the special order AND outsource it to SmallPrint Company.

Conclusion: The only way Johnson should accept the special order from Abbie Jenkins is if he were to outsource it to SmallPrint Company.

Analysis:

(1) Operating at full capacity and including special order.

Total Variable Expenses:

RM $6,000

DL 1,500

VOH 1,500

S&A 1,500

Total 10,500

$10,500/150,000 brochures = Variable expense of .07 per brochure

Selling price $17 per 100 brochures so $17/100 = .17 per brochure

.17-.07= contribution margin of $.10 when Johnson is operating at full capacity (150,000 brochures)

Now, consider the effect of accepting the special order for 25,000 brochures:

Selling price of $10/100 = .10 and variable expenses decrease to .06 (slash commission by $1/100 = .01)

.10-.06= contribution margin of .04 for special order

Therefore to produce these special brochures, we must give up (.10x25,000) $2,500 in order to make Abbie’s brochures.

Special Order (.04x25,000) $1,000

CM forgone

← If Johnson were to accept this order, profits would decrease by $1,500. Using profit as a rule of thumb, Johnson should not accept this order when he is at full capacity.

(2) Outsource 30,000 brochures.

I am assuming here that Johnson has said no to the special order and that he is choosing to help Ernest Bradley by outsourcing 30,000 brochures to him at a cost of $.08 per brochure ($8/100). The total cost to outsource would be $2,400 (30,000x$.08).

CM forgone (30,000x$.10)

Outsourcing cost 2,400

600

← The interpretation of this number is that it would produce an overall cost of $600 more than what would occur if Johnson did not...