Sportz-a-Lot, Inc. manufactures toys and sporting equipment, including golf kits

Question

Sportz-a-Lot, Inc. manufactures toys and sporting equipment, including golf kits for preschoolers. A national sporting goods chain recently submitted a special order for 7,600 golf kits. Sportz-a-Lot was not operating at capacity and could use the extra business. Unfortunately, the order's offering price of $16.50 per golf kit was below the cost to produce the sets. The controller was opposed to takinga loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a golf kit is presented below:

Direct Materials $7.90

Direct Labor 5.40

Variable Overhead 4.75

Fixed Overhead 3.10

Total $21.15

No variable selling or administrative expenses would be associated with the order.

a. Assume that the company would accept the order only if it inceased total profits. Should the company accept or reject the order? Provide supporting computations.

b. Suppose that Sportz-a-Lot has negociated with the potential customer, and has determined that it can substitute cheaper materials, reducing direct materials cost by $1.09 per unit. In addition, the company's engineers have found a way to reduce direct labor cost by $2.40 per unit. Should the company accept or reject the order? Provide supporting computations.

Explanation / Answer

7600*16.50=125400

7600*21.15=160740

a loss of 35340 $

35340/160740=22% of the making price

If assuming the other publicity through the school gives a better 35340 $ profit then ,then should accept the offer

but 22% is too high risk to take

so, they shouldnot take the offer.

b)

$8700 occurs if the making cost is reduced.

8700/132450=6% of the making cost

the can be countered by the publicity by the school .

therefore they have to take it

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