On November, 25, 2010 Marquez Golf Co. recieved a special order for 5,000 three-

Question

On November, 25, 2010 Marquez Golf Co. recieved a special order for 5,000 three-wood golf club sets. These golf clubs will be marketed in Japan. Ito Imports, Inc., the purchasing company, wants the clubs bulk packaged and is willing to pay $55 per set for the clubs. The president of Marquez Golf Co. has gathered the following product costing information about the set of woods being discussed: direct materials (wood), $500 per 100 sets; direct materials (metal shafts), $1,010 per 100 sets; and the direct materials (grips), $140 per 100 sets. Direct labor is $18 per set. Variable manufacturing costs are $12 per set, and fixed manufacturing costs are 20 percent of direct labor dollars. Variable selling expenses are $10 per set, and variable shipping costs are $7 per set. Fixed general and administrative costs are figured at 30 percent of direct labor dollars. Bulk shipping costs will total $11,000, thus eliminating both variable selling and variable shipping costs from consideration. The company did not expect this order and will reach planned production capacity for the year. However, there is enough plant capacity for the special order. Round numbers two decimal places.

a. Prepare an analysis for the president to use in deciding whether to accept or reject the offer by the Ito Imports, Inc. What decision should be made?

b. What is the lowest possible price Marquez Golf Co. could charge per set of woods and still make a $9,000 profit on this order?

Explanation / Answer

Marquez Golf Co a. Details Amt per set $ Amt $ for 5000 sets Sales revenue                         55                          275,000 Variable costs Direct Materials-wood                            5                            25,000 Direct materials -metal shafts                   10.10                            50,500 Direct Materials-grips                      0.14                                  700 Direct Labor                           18                            90,000 Variable Mfg cost                         12                            60,000 Total Variable cost                   45.24                          226,200 Contribution Margin                      9.76                      48,800.00 Fixed costs Fixed Mfg Cost                      18,000.00 Fixed Gen admin cost                      27,000.00 Fixed bulk shipping cost                      11,000.00 Total Fixed cost                      56,000.00 Net Opearting Income/(Loss)                      (7,200.00) Therefore Marquez Golf co should reject the offer. b. Lowest price for $9000 profit: Contribution required = Fixed cost           56,000.00 Plus Profit             9,000.00 To tal contribution required           65,000.00 Contribution per set required                   13.00 Total variable cost per set                   45.24 Required sales price per set=                   58.24 (assumed bulk shipping cost still valid)

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