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Blossom Cases manufactures several different styles of jewellery cases. Management estimates that during the first quarter of this year, the company...
Blossom Cases manufactures several different styles of jewellery cases. Management estimates that during the first quarter of this year, the company will operate at about 80% of normal capacity. Two special orders have been received, and management is making a decision about whether to accept either or both orders.
The first order is from Penny-Wise Department Stores. The manager would like to market a jewellery case similar to one of Blossom's current models. Penny-Wise wants its own label on the cases and is willing to pay $5.85 per case for 20,000 cases to be shipped by April 1. The cost data for Blossom's case that is similar to the requested case follow:
Selling price per unit $9.30
Cost per unit
Raw Materials $2.60
Direct labour (0.25 hr. × $12) 3.00
Overhead (0.25 machine hr. × $4) 1.00
Total cost per unit $6.60
According to the specifications supplied by Penny-Wise, the special order case requires less expensive raw materials. Therefore, the raw materials for the special order will cost $2.35 per case. Management believes that the rest of the costs, labour time, and machine time will remain the same as for Blossom's case.
The second order is from the Star-Mart Company. Its managers want 8,000 cases for $7.16 per case. These jewellery cases, to be marketed under the Star-Mart label, would also need to be shipped by April 1. However, these cases are somewhat different from any cases currently manufactured by Blossom. Following are the estimated unit costs:
Cost per unit
Raw Materials $2.97
Direct labour (0.25 hr. × $12) 3.00
Overhead (0.5 machine hr. × $4) 2.00
Total cost per unit $7.97
In addition to these per-unit costs, Blossom would incur $1,370 in setup costs and would need to purchase $2,330 in special equipment to manufacture these cases. Currently, Blossom would have no other use for the equipment once this order was filled.
Blossom's capacity constraint is total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year, or 7,500 hours per month. Fixed manufacturing overhead costs are allocated to production on the basis of machine hours at $4.00 per hour and are budgeted at $360,000 per year.
Blossom can work on the special orders throughout the entire first quarter, in addition to performing its normal production. Blossom's managers do not expect any repeat sales to be generated from either special order.
Q1. What is the excess capacity of machine hours available in the first quarter?
Excess capacity hours
Q2. ignore the Star-Mart order. Using the general decision rule, what is the minimum acceptable price for the Penny-Wise order? (Round to 2 decimal places, e.g. 5.28.)
Price$
Q3. ignore the Penny-Wise order. What is the contribution margin per case for the Star-Mart order? What would be the total expected profit (loss) incurred by accepting this order? (Round contribution margin per case to 2 decimal places, e.g. 5.75 and expected profit or loss to 0 decimal places, e.g. 125.)
Contribution margin per case$
Expected profit/(loss)$
Using only quantitative information, decide which special orders Blossom should accept.
Blossom should: reject both offers / accept only the Penny-Wise order / accept both the Penny-Wise and Star-Mart orders / accept only the Star-Mart order?
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