Groovy Music Company produces compact discs of background music for restaurants
ID: 2481230 • Letter: G
Question
Groovy Music Company produces compact discs of background music for restaurants and other retail shops. Its disc recording machines are capable of producing 50 discs per hour, and Groovy Music has a total of 5,000 machine hours of capacity. The unit-related cost of producing most discs is $3.00. The discs sell for $12.00 each. Food Mood Music Co. has approached Groovy Music with an offer to buy 10,000 copies of a disc for $9.00. Groovy Music estimates that for this special order the unit-related cost of producing the disc will be $5.00. In addition, to accept the special order, Groovy Music will have to purchase an additional special-purpose machine that will cost $6,000.
Required:
Assume that existing demand for Groovy Music's compact discs is 200,000 units. Prepare an analysis that indicates whether or not the special order should be accepted.
Explanation / Answer
Current Total capacity = Machine hours available x Disks per hour
= 5,000 x 50 = 250,000 disks
Existing demand = 200,000 units
So, Idle capacity = Total capacity - Utilized capacity = 250,000 - 200,000 = 50,000 units
Current demand for special order = 10,000 units which is within the idle capacity. So, the decision to accept the special offer will depend on the contribution generated.
Profit from special order = Contribution - Additional Costs
Contribution = (Sales - Variable costs) x Number of units
= ($9 - $5) x 10,000 = $40,000
Profit = $40,000 - $6,000 = $34,000
So, as we can see, the special order will generate a profit of $34,000 and hence should be accepted.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.