SPECIAL ORDER

Decide whether or not to accept a special order offer at a price below ormal
market price or even below cost price if the company's production capacity al-
lows it. Sportswear is considering an order from Start for the production of
30,000 baseballs with a herd of packs of 500 balls in one box. "Start" offers a
price of $ 3 per ball. The projected annual production is 500,000 balls, the cur-
rent annual production is 520,000 balls, the maximum production capacity of
the company is limited to 550,000 balls. Additional data are presented below.

Direct materials - 1
Direct labor - 0.5
Total production costs -
- variable – 0.5
- fixed-0.5
Unit packing costs-0.5
Advertising costs- 0.5
Other fixed selling and administrative costs-0.5
Selling price per unit 5
Total Estimated Bulk Packing Costs – 3.000

Compare the amount of profit!

Make calculations!

In this scenario, we need to determine if accepting the special order is worthwhile

by comparing the additional costs incurred by accepting the order with the revenue
generated from it. Since the order is for 30,000 baseballs, we will focus on the
variable costs associated with producing and selling these baseballs.

Variable costs per unit:

Direct materials: $1.00

Direct labor: $0.50
Variable production costs: $0.50
Unit packing costs: $0.50
Total variable cost per unit: $1.00 + $0.50 + $0.50 + $0.50 = $2.50
The selling price per unit for the special order is $3.00. To find the contribution
margin per unit, subtract the variable cost per unit from the selling price per unit:

Contribution margin per unit: $3.00 - $2.50 = $0.50

Now, we need to consider the bulk packing costs. The total estimated bulk packing
costs are $3,000. Divide this by the number of boxes required to ship the order
(30,000 balls / 500 balls per box = 60 boxes):
Bulk packing cost per box: $3,000 / 60 = $50

Since each box has 500 balls, we can find the bulk packing cost per unit:

Bulk packing cost per unit: $50 / 500 = $0.10

Now, subtract the bulk packing cost per unit from the contribution margin per unit
to find the net contribution margin per unit:

Net contribution margin per unit: $0.50 - $0.10 = $0.40

Since the net contribution margin per unit is positive ($0.40), it means that accept-
ing the special order will generate additional profit for the company. To find the
total additional profit, multiply the net contribution margin per unit by the number
of baseballs in the order:

Additional profit: $0.40 * 30,000 = $12,000

However, we also need to consider the production capacity. The company's max-
imum production capacity is 550,000 balls, and the current annual production is
520,000 balls. The remaining capacity for the year is:

Remaining capacity: 550,000 - 520,000 = 30,000 balls

Since the order is for 30,000 balls and the remaining capacity is 30,000 balls, the
company has just enough capacity to fulfill the order.

Based on these calculations, accepting the special order would be a good de-
cision as it generates an additional profit of $12,000 and the company has
enough production capacity to fulfill the order.