Question

Problem 1: Mystic Incorporated sells capiz shell wind chimes for $32.50 each. At their current
capacity, they can produce 65,000 wind chimes per year. The costs of producing and selling
65,000 wind chimes are as follows:
			Cost per		Total
			Chime		Costs
	Direct Materials		$11.70		$760,500.00
	Direct Mfg. Labor		2.93		190,450.00
	VMOH		0.98		63,700.00
	FMOH		4.88		317,200.00
	VC-Marketing		1.95		126,750.00
	FC-Marketing		3.90		253,500.00
	Total Cost		$26.34		$1,712,100.00
Requirement 1: Mystic is currently producing and selling 39,000 wind chimes; its fixed costs are
the same as given in the data above. Whimsey Corporation wants to place a one-time special
order for 26,000 wind chimes at a sales price of $24.38 each. Mystic will incur no variable sales
costs for this special order. Should it accept? Show your work to justify your answer!
Requirement 2: Suppose that Mystic is currently producing and selling 65,000 wind chimes. If it
accept's Whimsey's offer, it will have to sell 26,000 fewer wind chimes to its regular customers.
(a) On financial considerations alone, should Mystic accept this one-time special offer? Show
your work to justify your answer.
(b) On financial considerations alone, at what price would Mystic be indifferent between
accepting the special order and continuing to sell chimes to its regular customers at $31.20 each?
(c) What other factors should Mystic consider in deciding whether or not to accept the one-time
special offer?

Answer 1

1.Relevant Cost for acceptance of special order are:

Direct Material	11.70
Direct Labor	2.93
VMOH	0.98
Relevant Cost	$15.61

No fixed costs will be incurred for the special order since spare capacity exists.

No variable selling costs will be incurred as mentioned in question.

Since the sale price of $24.38 is more than the relevant cost, the special order should be accepted.

2.a)

Contribution Margin lost 26,000*(32.50-24.38)	211,120
Less: Savings in Variable Marketing Cost 26,000*1.95	50,700
Net Loss in accepting the special order	$160,420

Fixed costs will be incurred in both the options and hence not relevant for the decision.

On financial considerations alone, Mystic should not accept this one-time special offer

(b) Indifferent price will be regular sales price – Variable Selling Costs

= $31.20-1.95

= $29.25

(c)Other factors are:

1.Loss of regular customers

2. Loss of image

3. Entry into a potential market