Problem 1

Assume that Saint Mary’s University has asked Mattel to produce a special University Doll dressed in the
university’s uniform and carrying a backpack with the university logo. The University bookstore has
offered to buy 25,000 of these dolls at a price of P 7 each, which it would then sell in the bookstore and
in alumni catalogs for a retail price of P 15 each.. Mattel sells similar dolls to customers such as SM and
Robinson for P 9 each. Assume the estimated costs to produce the University doll as follows:
Direct materials P 3.50
Direct Labor 1.00
Variable overhead 0.50
Fixed manufacturing overhead 2.50
Total manufacturing costs P 7.50

Required:
a. Assume that Mattel has excess capacity. Should Mattel accept the special order?
b. What other qualitative factors should be considered?
c. Assume that there is no excess capacity. Should the company accept the special order?

Problem 2
Big Top Tent has received a special order for 10,000 units at a discounted price of P 100 each.
The product, which normally sells for P 150 has the following manufacturing costs:
Direct materials P 40
Direct labor 20
Variable manufacturing overhead 20
Fixed manufacturing overhead 30
Unit cost P 110

1. Assume Big Top has enough extra capacity to fill the order without affecting the production or
sale of its product to regular customers. If Big Top accepts the offer, what effect will the order
have on the company’s short-term profit?
2. If Big Top is at full capacity, what price would be needed to cover all incremental costs, including
opportunity costs?

Problem 3
Let us consider the packaging at Mattel in problem 1. Assume that Mattel currently performs all
packaging of its Doll collection in-house. The company produces a total of 200,000 dolls annually; cost
data for the packaging process (not the dolls themselves) follow:
 Internal Cost of Packaging 200,000 dolls per year
Annual Costs Unit Costs
Packaging materials (cardboard, plastic, etc) P 300,000 P 1.50
Packaging direct labor 90,000 0.45
Indirect materials (glue, tape, etc) 60,000 0.30
Packaging supervision 50,000 0.25
Other fixed manufacturing overhead 200,000 1.00
Total packaging costs P 700,000 P 3.50

Mattel has been negotiating with an outside supplier to provide packaging for the dolls. The supplier
has agreed to a price of P 3.00 per unit for all packaging related activities. The agreement includes a
three-year contract for a minimum of 200,000 units per year.

Additional information revealed the following:

1. All costs directly related to the packaging activities, including all direct and indirect materials,
labor and supervision could be avoided.
2. Other total fixed manufacturing overhead costs would remain unchanged.
3. The factory space now being used for packaging the dolls could be used to expand production of
a popular product line. The expansion would generate an additional P 150,000 in profit per
year.

Required: Should Mattel continue to do its own packaging or outsource these activities to the
supplier. Show all supporting computations. What other qualitative factors should be considered in
accepting the offer of the supplier?