Reference no: EM132692232

GIBCO Corporation manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from 311, Inc. 311 desires to market a skateboard similar to one of GIBCO's and has offered to purchase 12,000 units if the order can be completed in four months.

The cost data for GIBCO's Model S skateboard follow.

Direct material..................................................................................................... $ 9.20
Direct labour: 0.25 hr. @ $10........................................................................... 2.50
Total manufacturing overhead:
0.5 hr. @ $18.............................................................................................. 9.00
Total ..... ................................................................................................ $20.70

Additional data:

• The normal selling price of the Model S is $28.00; however, 311 has offered GIBCO only 17.00 because of the large quantity it is willing to purchase.
• 311 requires a modification of the design that will allow a $2.00 reduction in direct-material cost. 
• GIBCO'S production supervisor notes that the company will incur $4,000 in additional setup costs and will have to purchase a $2,000 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 $18 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5,000 per month). 
• GIBCO will allocate $2,000 of existing fixed administrative costs to the order as "part of the cost of doing business."Required:

Problem 1: Assume that present sales will not be affected. Should the order be accepted from a financial point of view (i.e., is it profitable)? Why or why not? Show calculations.

Problem 21: Assume that GIBCOS's current production activity consumes 65 percent of planned machine-hour activity. Can the company accept the order and meet 311's deadline?