The BonMatin Corporation produces all types of bowling balls. The Bowling Ball D

Question

The BonMatin Corporation produces all types of bowling balls. The Bowling Ball Division is currently producing 3,750 bowling balls per year with a capacity of 5,200. The variable costs assigned to each bowling ball are $576 and annual fixed costs of the division are $878,500. The bowling balls sell for $1,100. The Regal Bowling Ball Division wants to buy 1,450 bowling balls at $525 for its custom bowling ball business. The Home Bowling Ball manager refused the order because the price is below variable cost. The Regal manager argues that the order should be accepted because it will lower the fixed cost per bowling ball from $234.27 to $168.94 and will take the division to full capacity, thus making operations more efficient.
Bowling Ball Division:
Production 3,750 bowling balls
Sales price per bowling ball $1,100
Annual fixed costs $878,500
Capacity 5,200 bowling balls
Variable cost per bowling ball $576

1) Should the order from the Regal Bowling Ball Division be accepted by the Bowling Ball Division? Why?

Base your decision on the contribution margin that would be generated by the Regal Division's offer.

Explanation / Answer

1)

       IN CASE OF IDEAL CAPACITY WE CAN SELL UNUTILLASED CAPACITY AT A MIMIMUM PRICE OF VARIABLE COST

FIXED COST WILL BE IRRELEVANT FOR MAKING SUCH DECISION BECAUSE IT WILL INCURR EVEN IF NO UNIT WILL PRODUCE.

           HENCE THE ORDER FROM REGAL BOWLING BALL DEVISION SHOUL NOT BE ACCEPTED BACAUSE IT WANT TO BUY BALLS LOWER THAN VARIABLE COST.. THE CONTENTION OG MANAGER IS WRONG BECAUSE FIXED COST IS IRRELAVENT FOR DECISION MAKEING. IF BONMATIN GET ANYTHING MORE THAN VARIABLE COST THEN IT SHOULD ACCEPT SUCH PROPOSAL IT WILL RESULT IN INCREASE IN PROFIT

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