Question

Brady Lumber Company, a producer of oak lumber for furniture companies has an offer to supply a special load of lumber for an exporter. It will take three months to fill the order of 1,000,000 board metres. During the three months half of its production capacity will be utilized for the special order. The total fixed costs for the three months will be $6,000,000. Variable costs per 1,000 board metres will be $2,500.

The marketing manager believes that half of the capacity needed for the special order can become available if Bradly does not bid on a separate special order that they had expected on winning – this other special order would have generated an additional net profit of $240,000 if it had been accepted.

Required:

1. Determine the minimum price that needs to be charged for the special order.
2. List and briefly describe two other considerations that should be made when assessing this special order

Answer 1

A) minimal price = variable cost + profit foregone (opportunity cost)

Variable cost = 1000000 boards / 1000 boards * $2500

= $2500000

Profit foregone = $240000

So minimum price = $2500000 + $240000 = $2740000

Since fixed cost won't change because of this offer , there is no need to consider it.

B) 1. We need to check whether this offer will affect other production being done , whether we have sufficient labor and machine available to complete this without affecting other production.

2. Also we need to consider what price we are charging from others , it can be possible that if we charge less from one customer , our other customers will also demand the same rate.