Solved: Green Grow Inc GGI manufactures lawn fertilizer

and because o

Green Grow Inc. (GGI) manufactures lawn fertilizer and because of its very high quality often
receives special orders from agricultural research groups. For each type of fertilizer sold, each
bag is carefully filled to have the precise mix of components advertised for that type of fertilizer.
GGI’s operating capacity is 22,000 one-hundred-pound bags per month, and it currently is
selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a
request for a special order of 5,000 one-hundred-pound bags of fertilizer for $125,000 from
APAC, a research organization. The production costs would be the same, although delivery and
other packaging and distribution services would cause a one-time $2,000 cost for GGI. The
special order would be processed in two batches of 2,500 bags each. The following information
is provided about GGI’s current operations:
Sales and production cost data for 20,000 bags, per bag
Sales price ................ $38
Variable manufacturing costs ........ 15
Variable marketing costs ........... 2
Fixed manufacturing costs ......... 12
Fixed marketing costs ........... 2
No marketing costs would be associated with the special order. Since the order would be used
in research and consistency is critical, APAC requires that GGI fill the entire order of 5,000
bags.

Required
1. Should GGI accept the special order? Explain why or why not.
2. What would be the change in operating income if the special order is accepted?
3. Suppose that after GGI accepts the special order, it finds that unexpected production delays
will not allow it to supply all 5,000 units from its own plants and meet the promised delivery date.
It can provide the same materials by purchasing them in bulk from a competing firm. The
materials would then be packaged in GGI bags to complete the order. GGI knows the
competitor’s materials are very good quality, but it cannot be sure that the quality meets its own
exacting standards. There is not enough time to carefully test the competitor’s product to
determine its quality. What should GGI do?

ANSWER
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