Question

Case Study, Lisa's Golf Specialties, a French Company, manufactures golf accessories. One of the more popular accessories is the head cover shaped as a tiger (in the spirit of tiger woods) Currently, Lisa makes 500 tiger head covers per week, at a unit cost of 3.5 euros, which include both fixed and variable costs. Lisa sells the tiger head covers to distributors for 4.25 euros. A Japanese distributor, Mr. Fuji has proposed to buy an additional 100 tiger head covers per week for 2 euros. Lisa does have the capacity to produce the extra 100. With 600 tiger cover head covers in weekly production, the per unit costs would now be 3.1 euros. 1 From a financial viewpoint should Lisa accept Mr Fuji's offer? 2 what is the fixed cost, what is the variable cost per unit? 3 What other qualitative factors need to be considered in this decision?

Answer 1

Answer :

(1)

	Current profit	Proft after accepting the Fuji's offer
Nuber of unit	500	600
	euros	euros
Revenue	2125 ( 500 * 4.25 )	2325 ( 500*4.25 + 100*2)
Less - Cost	1750 ( 500*3.5)	1860 ( 600*3.10)
Net profit	375 euros	465 euros
Incremental Net profit if offer is accepted = 465 -375 = 90 euros

Lisa should accept Mr Fuji's offer .

(2)

Variable cost per unit

= Change in Total cost / Change in units

= 600 * 3.10 - 500*3.50 / 600-500

= 1860 - 1750 / 100

= 1.10 euros

Fixed cost = Total cost - Variable cost

= 500*3.5 - 500*1.10

= 1200 euros

(3) Qualitative Factor

Qualitative factor that can effect a special order decision are the special order's impact on sales to regular customer , It's ability to lead the company into new sales areas, and Customers ability to maintain relationship with company that includes good ordering and paying practices.