Question

Jupiter Corporation manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires to market a skateboard similar to one of Jupiter’s and has offered to purchase 11,000 units if the order can be completed in three months. The cost data for Jupiter’s model no. 43 skateboard follow.

Direct material	$	8.20
Direct labor: 0.25 hours at $9.00		2.25
Total manufacturing overhead:
0.5 hours at $20		10.00
Total	$	20.45

Additional data:

• The normal selling price of model no. 43 is $26.50; however, Venus has offered Jupiter only $15.75 because of the large quantity it is willing to purchase.
• Venus requires a modification of the design that will allow a $2.10 reduction in direct-material cost.
• Jupiter’s production supervisor notes that the company will incur $3,700 in additional setup costs and will have to purchase a $2,400 special device to manufacture these units. The device will be discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production at the rate of $20 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5,000 per month).
• Jupiter will allocate $1,800 of existing fixed administrative costs to the order as “... part of the cost of doing business.

2-a. Assume that Jupiter’s current production activity consumes 70 percent of planned machine-hour activity. Calculate the current available machine-hours.

2-b. Can the company accept the order and meet Venus’ deadline?

3. What options might Jupiter consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm? Below are the available options, more than one may be chosen.

• Completely ignore the additional setup costs and the new device costs, as these are fixed in nature
• Working overtime
• Outsourcing some units
• Acquiring more machine capacity
• Sacrificing some current business in the hope that a long-term relationship with Venus can be established and proves to be profitable

Answer 1

2-a. Planned Machine Hours = 5,000 per month

Consumed by current activity = 5,000*70% = 3,500 hours

Remaining per month = 1,500 hours

In 3 months = 1,500*3 = 4,500 hours

2-b. Hours required for special order = 11,000*0.5 = 5,500 hours

Available = 4,500 hours

Hence, The company cannot meet the deadline

3.The options which can be chosen are:

• Outsourcing some units

• Acquiring more machine capacity

• Sacrificing some current business in the hope that a long-term relationship with Venus can be established and proves to be profitable