Question

harman Athletic Gear Inc. (SAG) is considering a special order for 16,400 baseball caps with the logo of East Texas University (ETU) to be purchased by the ETU alumni association. The ETU alumni association is planning to use the caps as gifts and to sell some of the caps at alumni events in celebration of the university’s recent national championship by its baseball team. Sharman’s full manufacturing cost per hat is $4.40, which includes $2.20 fixed overhead cost related to plant capacity and equipment. ETU has made a firm offer of $43,000 for the hats, and Sharman, considering the price to be far below production costs, decides to decline the offer.

Required: 1-a. Determine the total cost of the special order.

1-b. In terms of maximizing short-term operating profit, did Sharman make the wrong decision in declining the offer from ETU?

Answer 1

Special order = 16,400 units

Manufacturing cost per unit = $4.40

Fixed overhead cost per unit = $2.20

Variable cost per unit = Manufacturing cost per unit - Fixed overhead cost per unit

= 4.40-2.20

= $2.20

a.

Due to the acceptance of the special order, only variable costs will increase and there will be no change in fixed overhead costs.

Hence, total cost of special order = Number of units x Variable cost per unit

= 16,400 x 2.20

= $36,080

b.

Profit from special order = Sale value - Total cost

= 43,000-36,080

= $6,920

Since special order would have provided a profit of $6,920, hence harman made the wrong decision in declining the offer from ETU.

Kindly comment if you need further assistance. Thanks‼!