Question

Edo Ltd produces cricket bats for kids that it sells for $37 each. At capacity, the compan produce54 000 bats a year. The costs of producing and selling 54 000 bats are as follow Total costs Cost per bat $14 Direct materials $756 000 Direct production labour 4 216 000 Variable production overhead 108 000 Fixed production overhead 270 000 108 000 Variable selling expenses Fixed selling expenses 162 000 Total costs $1 620 000 ----------------- ----- ---- -------- 1. Suppose that Edo Ltd is currently producing and selling 44 000 bats. At this level of production and sales, its fixed costs are the same as given in the preceding hemade Ltd wants to place a one-time special order for 10 000 bats at $21 each. Edo Ltd will incur no variable selling costs for this special order. Should Edo Ltd accept this one-time special order? Show your calculations. Now suppose that Edo Ltd is currently producing and selling 54 000 bats. If Edo Ltd accepts Homemade's offer, it will have to sell 10 000 fewer bats to its regular customers. a) On financial considerations alone, should Edo Ltd accept this one-time special order? Show your calculations. b) On financial considerations alone, at what price would Edo Ltd be indifferent between accepting the special order and continuing to sell to its regular customers at $37 per bat? c) What other factors should Edo Ltd consider in deciding whether to accept the one-time special order? -- ------- -- --- -- -- --- - -----

Answer 1

1]	Sales revenue for 10000 bats = 10000*21 =	$      2,10,000
	Less: Incremental costs of producing 10000 bats = 10000*(14+4+2) =	$     -2,00,000
	Incremental profits on special order	$          10,000
	As the special order would bring additional
	profit of $10,000, the one time special order
	should be accepted.
2]
a]	As the total production would be 54000 bats in
	either case, the total variable production costs
	and the total production fixed costs would be
	same. The fixed selling expenses would also
	not differ.
	The items that vary are:
	*The total revenues
	*The variable selling expenses that would not
	be incurred for the special order.
	Hence, the benefits and costs are:
	Reduction in selling price on the special order = 10000*(37-21) =	$     -1,60,000
	Savings in variable selling costs = 10000*2 =	$          20,000
	Incremental loss on special order	$     -1,40,000
	No, the one time order should not be accepted
	as it will result in an incremental loss of $1,80,000
b]	The special order price should eliminate the
	likely loss under [a] above.
	Price, for being indifferent = 21+140000/10000 =	$            35.00
c]	As 10000 units of the existing market would be lost
	the following should be considered.
	*whether the units lost in the existing markets can
	be recaptured or would be lost to competitors
	permanently.
	*whether homemade limited would sell the bats
	in the firm's market at a lower price and or at a
	lower price.