Bates Golf Supply produces a golf bag that sells for $220. Although the company's production capacity is 5,000 bags per year, only 4,000 bags are currently being produced and sold. The production costs for 4,000 bags are as follows: Unit-level material cost$300,000 Unit-level labor cost 240,000 Unit-level overhead 75,000 Batch-level setup costs (500 units per batch) 16,000 Product-level costs 20,000 Allocated facility-level costs 25,000 Golf Mart Stores has offered to purchase 1,000 golf bags as a one-time special purchase at a price of $170 per bag.Required:1) Prepare a quantitative analysis that indicates whether the special order should be accepted. 2) What qualitative factors should be considered in this special order decision?
What will be an ideal response?
1) Evaluation of special order:
| Revenue (1,000 × $170) | $ | 170,000 | |
| Less special order costs: | |||
| Unit-level costs (($300,000 + 240,000 + 75,000) × 1,000/4,000) | 153,750 | ||
| Batch-level costs ($16,000/8 batches) × 2 | 4,000 | ||
| Increase in profit if special order accepted | $ | 12,250 | |
| Therefore, the special order should be accepted. |
2) Qualitative factors:
-Impact on existing customer goodwill when a special order is accepted at a below normal selling price.
-Customer would need to understand that special order prices cannot be repeated.
-Existence of sufficient idle capacity was critical to the decision to accept this special order. If a special order was accepted when there was not enough excess capacity, the special order would need to generate sufficient contribution to replace contribution lost on normal sales.
Business
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