Hitter Corporation produces baseball bats for kids that it sells for $40 each. A

Question

Hitter Corporation produces baseball bats for kids that it sells for $40 each. At capacity, the company can produce 54,000 bats a year. The costs of producing and selling 54,000 bats are as follows (Click to view the costs.) Read the requirements Requirement 1. Suppose Hitter is currently producing and selling 22,000 bats. At this level of production and sales, its fixed costs are the same as given in the preceding table. Gehrig Corporation wants to place a one-time special order for 32,000 bats at S30 each. Hitter will incur no variable selling costs for this special order. Should Hitter accept this one-time special order? Show your calculations Determine the effect on operating income if the order is accepted. (Enter decreases in operating income with parentheses or a minus sign.) Revenues from special order Variable manufacturing costs Increase (decrease) in operating income if order is accepted Hitter should S 960,000 704,000 $ 256,000 accept Gehrig's special order because it increases operating income by $ 256,000 Requirement 2. Now suppose Hitter is currently producing and selling 54,000 bats. If Hitter accepts Gehrig's offer it will have to sell 32,000 fewer bats to its regular customers. (a) On financial considerations alone, should Hitter accept this one-time special order? Show your calculations. (b) On financial considerations alone, at what price would Hitter be indifferent between accepting the special order and continuing to sell to its regular customers at $40 per bat? (c) What other factors should Hitter consider in deciding whether to accept the one-time special order? (a) On financial considerations alone, should Hitter accept this one-time special order? Show your calculations Determine the effect on operating income if the order is accepted. (Enter decreases in operating income with parentheses or a minus sign.) Increase (decrease) in operating income if order is accepted

Explanation / Answer

Req 1 Revenue from Special order(32,000 bats@30) 960000 Less: Variable manufacturing cost (32,000 bats@22) 704000 (16+5+1) Increase in net operating income 256000 Hence, special order must be accepted Req2: Selling price to regular customer $40 per unit Variable cost to regular customer(15+5+1+4) $26 per unit Contribution earned from regular customer $14 per unit Now, if special order is accepted, the sales units to forego to regular customer Revenue from Special order(32,000 bats@30) 960000 Less: Variable manufacturing cost (32,000 bats@22) 704000 (16+5+1) Less: Contribution to be foregone for accepting order 448000 (32000 units to regular customer @14) Decrease in Net operating income -192000 Special order must not be accepted Apart from this, if we accept the special order @30 per unit, then there are chances that the regualr customers will also demand the fall in prices on all the units.

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