1)Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Spo
ID: 2420632 • Letter: 1
Question
1)Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Sports- Cardz with a special order. The Hall of Fame wishes to purchase 51,000 baseball card packs for a special promotional campaign and offers $0.44 per pack, a total of $22,440. Sports- Cardz's total production cost is $0.64 per pack, as follows:
variable costs:
direct materials: $0.13
direct labor: $0.09
variable overhead: $0.12
fixed overhead: $0.30
total cost: $0.64
Sports-cardz has enough excess capacity to handle the special order.
1.Prepare an incremental analysis to determine whether Sports- Cardz should accept the special sales order.
2. Now assume that the hall of fame wants special hologram baseball cards. Sports-Cardz will spend $5,200 to develop this hologram, which will be useless after the special order is completed. Should sports-cardz accept the special order under these circumstances?
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2)San Jose sunglasses sell for about $154 per pair. Suppose that the company incurs the following average costs per pair:
direct materials: $41
direct labor: $13
variable manufacturing overhead: $10
variable marketing expenses: $2
fixed manufacturing overhead: $20
total cost: $86
*$2,350,000 total fixed manufacturing overhead/ 117,500 pairs of sunglasses
San Jose has enough idle capacity to accept a one-time-only special order from Washington Shades for 23,000 pairs of sunglasses at $79 per pair. San Jose will not incur an variable marketing expenses for the order.
a. How would accepting the order affect San Jose's Sunglasses operating income? In addition to the special oder's effect on profits, what other (longer-term, qualitative) factors should San Jose's Sunglasses managers consider in deciding whether to accept the order? Prepare the analysis to determine the effect on operating income.
b. San Jose's marketing manager, Peter Bing, argues against accepting the special order because the offer price of $79 is less than San Jose's $86 cost to make the sunglasses. Bing asks you, as one of San Jose's staff accountants, to explain whether his analysis is correct.
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3) Top managers of Movie Street are alarmed by their operating losses. They are considering dropping the VCR-tape product line. Company accountants have prepared the following analysis to help make this decision:
Movie Street
Income Statement
For the year ended December 31, 2012
Sales revenue : total ($432,000), DVD discs ($304,000), VCR tapes ($128,000)
Variable expenses: total ($242,000), DVD discs ($152000), VCR tapes ($90,000)
contribution margin: total ($190,000), DVD discs ($152,000), VCR tapes ($38,000)
Fixed expenses:
manufacturing: total (128,000), DVD discs ( 71000), VCR tapes (57,000)
marketing and administrative: total (78,000), DVD discs (59,000), VCR tapes (19,000)
total fixed expenses: Total ( 206,000) , DVD discs (130,000), VCR tapes (76,000)
operating income (loss): Total (-$16,000), dvd discs (22,000), VCR tapes (-$38,000)
Total fixed costs will not change if the company stops selling VCR tapes.
a. Prepare an incremental analysis to show whether Movie Street should drop the VCR-tape product line. Will dropping the VCR tapes add $38,000 to operating income? explain.
Explanation / Answer
1. Fixed cost of $ 0.30 is considered to be allocated and unavoidable fixed cost, and hence is not relevant for decision making in this case. Therefore total variable cost per unit = $ 0.13 + 0.09 + 0.12 = $ 0.34.
Hence total contribution margin = (0.44 - 0.34) x 51,000 = $ 5,100.
Therefore operating income will increase by $ 5,100 as a result of this special order. So it should be accepted.
However, the order with hologram cards should not be accepted, unless Hall of fame agrees to pay for the development cost of hologram.
2. a.
a. It is clear that acceptance of the special order will generate additional operating income of $ 345,000, and hence should most certainly be accepted. This not only would lead to better capacity utilization for San Jose plant, but could also open up possibilities for more business opportunities from Washington Shades. San Jose can also, by catering to this special order, make inroads into the optical glass market of the east.
b. No, Bing's contention is wrong. The cost of making a pair of sunglasses for Washington Shades is $ 64 only, and not $ 86.
3. Incremental analysis:
No, dropping the VCR tapes line does not add $ 38,000 to operating income. Rather this decision would increase the operating loss by another $ 19,000. This is because of underrecovery of fixed manufacturing overheads, as facilities are rendered idle. At least the VCR line was making a positive contribution of $ 38,000 towards fixed costs and operating income!!
Existing Existing +Special order Sales revenue 18,095,000 19,912,000 Less variable costs 7,755,000 9,227,000 Contribution margin 10,340,000 10,685,000 Fixed manufacturing overhead costs 2,350,000 2,350,000 Operating income 7,990,000 8,335,000Related Questions
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