Vanessa Corporation manufactures faucets. Several weeks ago, the firm received a special-order inquiry from Yale, Inc. Yale desires to market a faucet similar to Vanessa's model no. 55 and has offered to purchase 3,000 units. The following data are available: Cost data for Vanessa's model no. 55 faucet: direct materials, P45; direct labor, P30 (2 hours at P15 per hour); and manufacturing overhead, P70 (2 hours at P35 per hour). The normal selling price of model no. 55 is P180; however, Yale has offered Cornell only P115 because of the large quantity it is willing to purchase. Yale requires a design modification that will allow a P4 reduction in direct-material cost. Vanessa's production supervisor notes that the company will incur P8,700 in additional set-up costs and will have to purchase a P3,300 special device to manufacture these units. The device will be discarded once the special order is completed. Total manufacturing overhead costs are applied to production at the rate of P35 per labor hour. This figure is based, in part, on budgeted yearly fixed overhead of P624,000 and planned production activity of 24,000 labor hours. Vanessa will allocate P5,000 of existing fixed administrative costs to the order as "…part of the cost of doing business." Required: One of Vanessa's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Vanessa currently has excess capacity? Show calculations to support your answer. If Vanessa currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain. Assume that Vanessa currently has no excess capacity. Would outsourcing be an option that Vanessa could consider if management truly wanted to do business with Yale? Briefly discuss, citing several key considerations for Vanessa in your answer.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Vanessa Corporation manufactures faucets. Several weeks ago, the firm received a special-order inquiry from Yale, Inc. Yale desires to market a faucet similar to Vanessa's model no. 55 and has offered to purchase 3,000 units. The following data are available:

Cost data for Vanessa's model no. 55 faucet: direct materials, P45; direct labor, P30 (2 hours at P15 per hour); and manufacturing overhead, P70 (2 hours at P35 per hour).
The normal selling price of model no. 55 is P180; however, Yale has offered Cornell only P115 because of the large quantity it is willing to purchase.
Yale requires a design modification that will allow a P4 reduction in direct-material cost.
Vanessa's production supervisor notes that the company will incur P8,700 in additional set-up costs and will have to purchase a P3,300 special device to manufacture these units. The device will be discarded once the special order is completed.
Total manufacturing overhead costs are applied to production at the rate of P35 per labor hour. This figure is based, in part, on budgeted yearly fixed overhead of P624,000 and planned production activity of 24,000 labor hours.
Vanessa will allocate P5,000 of existing fixed administrative costs to the order as "…part of the cost of doing business."

Required:

One of Vanessa's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Vanessa currently has excess capacity? Show calculations to support your answer.
If Vanessa currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain.
Assume that Vanessa currently has no excess capacity. Would outsourcing be an option that Vanessa could consider if management truly wanted to do business with Yale? Briefly discuss, citing several key considerations for Vanessa in your answer.

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