Question

1. Special order: Toy Story Corporation manufactures collectible toy cars in a plant that has a capacity to produce 3,000 cars per month. Current production is at 80% of capacity. The normal selling price is $90 per car, and unit and facility level costs are as follows:

        Unit Level Manufacturing Costs              $ 28,560

        Facility Manufacturing Costs                   $ 96,000

        Facility Marketing Costs                          $ 78,000

                        Total Costs                              $ 202,560

1. Toy Story has just received a special order from a Japanese Company for 500 cars at $35 each. Since Toy Story has never competed in Japan, they decide to hire a consultant for $5500 to obtain advice on conducting business in Japan. Should Toy Story accept the special order?

Answer 1

Sol. As the Current Production of Toy Story is 80% (i.e 3000*80%= 2400 Units) and they have idle capacity of 600 Units. So they can take the order as no constraint with respect to capacity.

Now we have to check whether it would be beneficial for the company to take the order:

	Particulars	Commenst/Working	Amount (In $)
	Sale Value	500 Cars * $35	17500
Less:	Unit Level Manufacturing Cost	(28560/2400)*500 Cars	5950
Less:	Facility Manufacturing Cost	Fixed cost thus irrelevant, as it won't change if we accept or not the special order	0
Less:	Facility Marketing Cost	Fixed cost thus irrelevant, as it won't change if we accept or not the special order	0
Less:	Consultant's Fees	To be incurred only if Special order is accepted thus relevant cost	5000
		Profit from Special Order	6550

Thus Toy Story corporation should accept the special order as it will increase company's profit by $6550.