Assume RajanManufacturing Ltd makes sports vest for local soccer, baseball, basketball, and other sports teams. Rajan, the owner, purchases the vests and prints graphics on the vests for each team. The graphics were designed several years ago, so design costs are no longer incurred. On average, Rajan sells 1,000 vests each month. Typical monthly financial data is shown below: Per Unit Total Monthly Data at 1,000 Vests Sales revenue $20 $20 000 Variable costs: Direct materials $8 $8 000 Direct labour 2 2 000 Manufacturing overhead 3 13 3 000 13 000 Contribution margin $ 7 $ 7 000 Fixed costs (rent, salaries, etc.) 4 000 Profit $ 3 000 The monthly information provided relates to the company’s routine monthly operations. A representative of the local university recently approached Rajan to ask about a one-time special order. The university will be hosting a state-wide soccer event and is willing to pay Rajan’s Manufacturing $17 per shirt to make 200 custom vests for the event. Enough idle capacity exists to handle this order; hence, it will not affect other sales. Rajan requires a modification of the design that will allow a $1 reduction indirect material cost. All other variable costs will be incurred to produce the special order, and he will pay a firm $600 to design the graphics that will be printed on the vests. This special order will have no other effect on Rajan’s monthly fixed costs. Required: Should Rajan accept the special order? Show calculation.
Assume RajanManufacturing Ltd makes sports vest for local soccer, baseball, basketball, and other sports teams. Rajan, the owner, purchases the vests and prints graphics on the vests for each team. The graphics were designed several years ago, so design costs are no longer incurred. On average, Rajan sells 1,000 vests each month. Typical monthly financial data is shown below:
|
|
Per Unit |
Total Monthly Data at 1,000 Vests |
||
|
Sales revenue |
|
$20 |
|
$20 000 |
|
Variable costs: |
|
|
|
|
|
Direct materials |
$8 |
|
$8 000 |
|
|
Direct labour |
2 |
|
2 000 |
|
|
Manufacturing |
3 |
13 |
3 000 |
13 000 |
|
Contribution margin |
|
$ 7 |
|
$ 7 000 |
|
Fixed costs (rent, salaries, etc.) |
|
|
|
4 000 |
|
Profit |
|
|
|
$ 3 000 |
The monthly information provided relates to the company’s routine monthly operations. A representative of the local university recently approached Rajan to ask about a one-time special order. The university will be hosting a state-wide soccer event and is willing to pay Rajan’s Manufacturing $17 per shirt to make 200 custom vests for the event. Enough idle capacity exists to handle this order; hence, it will not affect other sales.
Rajan requires a modification of the design that will allow a $1 reduction indirect material cost. All other variable costs will be incurred to produce the special order, and he will pay a firm $600 to design the graphics that will be printed on the vests.
This special order will have no other effect on Rajan’s monthly fixed costs.
Required:
Should Rajan accept the special order? Show calculation.
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