Special order, short-run pricing. Diamond Corporation produces baseball bats for kids that it sells for $37 each. At capacity, the company can produce 54,000 bats a year. The costs of producing and selling 54,000 bats are as follows: Cost per Bat Total Costs Direct materials $14 $ 756,000 Variable direct manufacturing labour 4 216,000 Variable manufacturing overhead 2 108,000 Fixed manufacturing overhead 5 270,000 Variable selling expenses 2 108,000 Fixed selling expenses 3 162,000 Total costs $30 $1,620,000 Required Suppose Diamond is currently producing and selling 44,000 bats. At this level of production and sales, its fixed costs are the same as given in the preceding table. Home Run Corporation wants to place a one-time special order for 10,000 bats at $21 each. Diamond will incur no variable selling costs for this special order. Should Diamond accept this one-time special order? Show your calculations. Now suppose Diamond is currently producing and selling 54,000 bats. If Diamond accepts Home Run’s offer, it will have to sell 10,000 fewer bats to its regular customers. (a) On financial considerations alone, should Diamond accept this one-time special order? Show your calculations. (b) On financial considerations alone, at what price would Diamond be indifferent between accepting the special order and continuing to sell to its regular customers at $37 per bat. (c) What other factors should Diamond consider in deciding whether to accept the one-time special order?
Special order, short-run pricing. Diamond Corporation produces baseball bats for kids that it sells for $37 each. At capacity, the company can produce 54,000 bats a year. The costs of producing and selling 54,000 bats are as follows:
Cost per Bat Total Costs
Direct materials $14 $ 756,000
Variable direct manufacturing labour 4 216,000
Variable manufacturing
Fixed manufacturing overhead 5 270,000
Variable selling expenses 2 108,000
Fixed selling expenses 3 162,000
Total costs $30 $1,620,000
Required
- Suppose Diamond is currently producing and selling 44,000 bats. At this level of production and sales, its fixed costs are the same as given in the preceding table. Home Run Corporation wants to place a one-time special order for 10,000 bats at $21 each. Diamond will incur no variable selling costs for this special order. Should Diamond accept this one-time special order? Show your calculations.
- Now suppose Diamond is currently producing and selling 54,000 bats. If Diamond accepts Home Run’s offer, it will have to sell 10,000 fewer bats to its regular customers. (a) On financial considerations alone, should Diamond accept this one-time special order? Show your calculations. (b) On financial considerations alone, at what price would Diamond be indifferent between accepting the special order and continuing to sell to its regular customers at $37 per bat. (c) What other factors should Diamond consider in deciding whether to accept the one-time special order?
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