Question

Part Six
in March of year 3, Big Al’s receives a special order from an athletic arena to purchase 5,000 meat pizzas and 3,000 veggie pizzas for a special charity event.

Required:
A. Assuming that Big Al’s has sufficient excess capacity, what is the minimum price that Big Al’s would be willing to accept for this special order? Assuming that Big Al’s does not have sufficient excess capacity, what minimum price would be acceptable? What qualitative factors should Big Al’s consider before agreeing to accept the special order?
B. Big Al’s is nearing its manufacturing capacity and needs to consider ways to increase throughput. What options does Big Al’s have to increase capacity? What bottlenecks does it face? What recommendations would you make?

	Meat	Veggie
Direct Material Cost	$                     0.74	$                           0.62
Direct Labor Costs	$                     2.51	$                           2.78
Variable overhead per pizza	$                     0.55	$                           0.55
Total:	$                     3.80	$                           3.95
Sales Price	$                     5.00	$                           5.25
Contribution Margin	$                     1.20	$                           1.30

Answer 1

Big Al's If Big Al's Pizza has excess capacity to produce meat pizza and veggie pizza, then Minimum price Variable Cost of the product Meat Pizza Veggie Piza Unit Cost Direct Material 0.74 0.62 Direct Labor 2.51 2.78 Variable Overhead 0.55 0.55 Total Cost per unit 3.8 3.95 If Big Al's Pizza is not having excess capacity, then Minimum Price Variable Cost Contribution lost For Meat Pizza = 3.80(5.25-3.8) 5.25 For Veggie Pizza = 3.95+ (5-3.95) 5.00 Qualitative Factors to be considered before accepting the special order 1. Spare capacity to produce special offer. 2. Effect on regular sales of accepting the special order. |3. Whether the price offered for special order is sufficient enough to cover the incremental cost. For increasing the existing capacity, Big Al may consider following options 1. It may acquire more factors of production. 2. Purchasing new and better plant & machinery. |3. Recruiting new marketing staff. 4. Adopting new technology of production. Decision to increase capacity is critical and costly 1. Increasing Capacity may lead to more investment and more capital is required. 2.For increasing capacity, business needs to be in the growth face. 3. It needs to estimate its future cash flows. 4. Purchasing new machinery may cost more money, than starting a new shift on the old machine