Curtis Cap Company manufactures and sells ball caps with a special logo on the b

Question

Curtis Cap Company manufactures and sells ball caps with a special logo on the back of the cap that it has copyrighted. Curtis sells its caps through many retail outlets and it has a set price of $21.00. Recently, Major League Baseball (MLB) has approached Curtis with an offer to purchase 10,000 caps for $170,000 for this year’s MLB Division Championship Series (ALDS and NLDS). The MLB caps require the use of MLB’s own logo and will cause Curtis to purchase a special machine and set-up costing $10,000 with no apparent future use or value (the machine imprints the 2011 championship winning team logo). Curtis cost structure for the production of its caps is as follows:

Direct material: $7.00

Direct labor:....$2.00

Manufacturing Overhead: $8.00

In addition to the costs above, the special logo application will cost $2.00 per cap. Due to the fact that the Divisional Series could be finished by October 3, 2011(for the ALDS) and October 4, 2011 (for the NLDS), MLB has requested expedited delivery costing another $1.00 per cap. While most of the Manufacturing Overhead is fixed, Variable Overhead is estimated at $3.00 per cap. It is expected that this order can be fulfilled within the existing capacity of Curtis Cap Company and will not affect existing sales.

Required: What will be the affect on income if Curtis accepts this order? Based on your answer of income, should Curtis accept the order? Show all your work for point consideration.

Explanation / Answer

Statement of Incremental Cost If MLB order is Accepted Particulars Amount Incremental Sales Sales to MLB (10000 Caps)              170,000 Incremental Cost Direct Material (10000 Caps X $7)          70,000 Direct Labor (10000 Caps X $2)          20,000 Variable MOH (10000 Caps X $3)          30,000 Special Logo Application (10000 Caps X $2)          20,000 Expediate delivery Cost (10000 Caps X $1)          10,000 Purchase of Special Machine          10,000              160,000 Incremental Profit / (Loss)                10,000 Cusrtis should accept the offer as it will increase its income by $10000

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