Reference no: EM133183818
Question - St Tropez manufactures different styles of jewellery cases in southern France. The St Tropez manufacturing capabilities are limited by the total machine hours available. The plant's capacity is 90 000 machine hours per year. Management estimates that during the third quarter of the year (July - September) the company will be operating at 80% of normal capacity.
St Tropez received a special order from Lyon Jewellery on 1 July 2015 for a jewellery case similar to one of the jewellery cases manufactured by St Tropez. The Lyon jewellery case would be marketed under Lyon Jewellery's "Jetaime" product line. Lyon Jewellery has offered St Tropez R85.00 per jewellery case for 20 000 cases to be shipped by 1 October 2015.
The cost data for the St Tropez jewellery case, which would be similar to the specifications of Lyon Jewellery's special order, are as follows:
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Notes
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R per unit
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Regular selling price
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120.00
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Direct materials
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1
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35.00
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Direct labour (0.5 hour at R60 per hour)
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2
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30.00
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Total manufacturing overheads (0.25 machine hours at R40)
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3 & 4
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10.00
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Total manufacturing cost
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75.00
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Shipping cost
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5
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10.00
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Total cost per jewellery case
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85.00
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Additional information:
1. According to the specifications provided by Lyon Jewellery, the special order jewellery case requires more expensive material, which will increase the direct material cost by 15%.
2. The direct labour time and cost will remain the same as for the St Tropez jewellery case. Assume the labour cost to be a variable cost.
3. The Lyon jewellery case will require 0.25 machine hours at R40 per hour.
4. Total manufacturing overhead costs are applied to production on the basis of full capacity machine hours. The budgeted fixed manufacturing overheads for the year amounts to R2 160 000.
5. 20% of the shipping cost per unit is variable while the rest is allocated fixed cost at full capacity.
6. St Tropez will incur R30 000 in additional machine set-up costs and will have to purchase a special printer to the value of R20 000 to print the word "Jetaime" on the lid of the jewellery case. The special printer will have no use once the special order is completed.
Required -
1. Make a recommendation, based on relevant costing calculations, whether the special order from Lyon Jewellery should be accepted or not. Show all your calculations.
2. List three qualitative factors that the management of St Tropez should consider in the acceptance of the special order.