11-34 Special order, short-run pricing. Diamond Corporation produces baseball ba
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Question
11-34 Special order, short-run pricing. Diamond Corporation produces baseball bats for kids that it sells for $37 each. At capacity, the company can produce 54,000 bats a year. The costs of producing and selling 54,000 bats are as follows: Cost per Bat $14 Direct materials Variable direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total costs Total Costs 756,000 216,000 108,000 270,000 108,000 162,000 $1,620,000 $30 1. Suppose Diamond is currently producing and selling 44,000 bats. At this level of production and sales, its fixed costs are the same as given in the preceding table. Home Run Corporation wants to place a one-time special order for 10,000 bats at $21 each. Diamond will incur no variable sell ing costs for this special order. Should Diamond accept this one-time special order? Show your calculations. 2. Now suppose Diamond is currently producing and selling 54,000 bats. If Diamond accepts Home Run's offer, it will have to sell 10,000 fewer bats to its regular customers. (a) On financial considerations alone, should Diamond accept this one-time special order? Show your calculations. (b) On financia alone, at what price would Diamond be indifferent between accepting the special order and continuing to sell to its regular customers at $37 per bat. (c) What other factors should Diamono consider in deciding whether to accept the one-time special order?Explanation / Answer
Answer 1. Statement of Incremental Profit If Special Order is Accepted - 10,000 Bats Incremental Income Sales Revenue - 10,000 Nos X $21 210,000.00 Incremental Cost: Direct Materials - 10,000 Nos X $14 140,000.00 Direct Labor - 10,000 Nos X $4 40,000.00 Variable MOH - 10,000 Nos X $2 20,000.00 200,000.00 Incremental Profit (Loss) 10,000.00 Yes, Diamond Corporation should accept the Order. Answer 2-a. Statement of Incremental Profit If Special Order is Accepted - 10,000 Bats Incremental Income Sales Revenue - 10,000 Nos X $21 210,000.00 Savings of Variable Selling Expense - 10,000 Nos X $2 20,000.00 230,000.00 Incremental Cost: Direct Materials - 10,000 Nos X $14 140,000.00 Direct Labor - 10,000 Nos X $4 40,000.00 Variable MOH - 10,000 Nos X $2 20,000.00 Loss of Contribution on Normal sales - 10,000 Nos X $15 150,000.00 350,000.00 Incremental Profit (Loss) (120,000.00) Contribution Margin per Bat - Normal sales = $37 - ($14 + $4 + $2 + $2) Contribution Margin per Bat - Normal sales = $15 No, Diamond Corporation should not accept the Order. Answer 2-b. Special order Price per Unit = Incremental Cost + Contribution Lost per Unit Incremental Cost = $14 + $4 + $2 = $20 Contribution Lost per Unit = $37 - ($14 + $4 + $2 + $2) Contribution Lost per Unit = $15 per unit Special order Price per Unit = $20 + $15 Special order Price per Unit = $35 per Unit Answer 2-c. The other factors to be considered before accepting the order are: 1. Effect of on relationship between the existing customers. 2. Whether the order is a one time or can be repeated in future.
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