E25-10 Making special pricing decisions (504) Learning Objective 1 | ||||||
Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Hungry-Cardz with a special order. The Hall of Fame wishes to purchase 55,000 baseball card packs for a special promotional campaign and offers $0.33 per pack, a total of $18,150. Hungry-Cardz’s total production cost is $0.53 per pack, as follows: | ||||||
Variable costs: | ||||||
Direct materials | $0.13 | |||||
Direct labor | 0.04 | |||||
Variable overhead | 0.11 | |||||
Fixed overhead | 0.25 | |||||
Total cost | $0.53 | |||||
Hungry-Cardz has enough excess capacity to handle the special order. | ||||||
Requirements | ||||||
1. Prepare a differential analysis to determine whether Hungry-Cardz should accept the special sales order. | ||||||
2. Now assume that the Hall of Fame wants special hologram baseball cards. Hungry-Cardz will spend $5,000 to develop this hologram, which will be useless after the special order is completed. Should Hungry-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.33 per pack? |
1.
Analysis of Special Order | |
Sales (55,000 x 0.33) | 18,150 |
Less: | |
Direct materials (55,000 x 0.13) | -7,150 |
Direct labor (55,000 x 0.04) | -2,200 |
Variable overhead (55,000 x 0.11) | -6,050 |
Net Income | $2,750 |
Special sales order should be accepted since it will provide a net income of $2,750.
Fixed overhead is note relevant here since it will not increase due to the acceptance of special order.
2.
Analysis of Special Order | |
Sales (55,000 x 0.33) | 18,150 |
Less: | |
Direct materials (55,000 x 0.13) | -7,150 |
Direct labor (55,000 x 0.04) | -2,200 |
Variable overhead (55,000 x 0.11) | -6,050 |
Hologram cost | -5,000 |
Net Income | -$2,250 |
Special sales order should not be accepted since it will provide a net loss of $2,250.
Fixed overhead is note relevant here since it will not increase due to the acceptance of special order.
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