Reference no: EM132959285
Question - Jazzy Ltd manufactures several different styles of jewellery cases. Management estimates that during the first quarter of this year the company will operate at about 80 per cent of normal capacity. Two special orders have been received, and management is making a decision about whether to accept either or both orders.
The first order is from Penny-Wise Department Stores. The manager, Jess Park, would like to market a jewellery case similar to one of Jazzy Ltd's current models. Penny-Wise wants its own label on the cases and is willing to pay $5.75 per case for 20,000 cases to be shipped by 1 April. Below is the cost data for Jazzy Ltd's case, which is similar to the requested case:
Jazzy Ltd's Case Selling price per unit $9.00
Manufacturing cost per unit Raw materials $2.50
Direct labour and variable overhead 3.00
Fixed overhead (0.25 machine hours × $4 per hour) 1.00
Total manufacturing cost per unit $6.50
According to the specifications supplied by Penny-Wise, Jazzy estimates the special order case requires less expensive raw materials. Therefore, the raw materials for the special order will cost $2.25 per case. Management believes that the rest of the costs, labour time, and machine time will remain the same as for Jazzy's case.
The second order is from the Star-Mart Company. Its managers want 8,000 cases for $7.50 per case.
These jewellery cases, to be marketed under the Star-Mart label, would also need to be shipped by 1 April. However, these cases are somewhat different from any cases currently manufactured by Jazzy.
Following are the estimated unit costs by Jazzy:
Star-Mart's Case
Selling price per unit $7.50
Manufacturing cost per unit Raw materials $3.25
Direct labour and variable overhead 3.00
Fixed overhead (0.5 machine hours × $4 per hour) 2.00
Total manufacturing cost per unit $8.25
In addition to these per-unit costs, Jazzy would incur $1,500 in setup costs and would need to purchase $2,500 in special equipment to manufacture the Star-Mart cases. Currently, Jazzy would have no other use for the equipment once this order was filled.
Jazzy's capacity constraint is total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year or 7,500 hours per month. Fixed manufacturing overhead costs are allocated to production on the basis of machine-hours at $4 per hour and are budgeted at $360,000 per year.
Jazzy can work on the special orders throughout the entire first quarter under normal operations.
Jazzy's managers do not expect any repeat sales to be generated from either special order.
Required -
1) Ignore the Star-Mart order, what is the minimum acceptable price for the Penny-Wise order? What would be the total expected profit (loss) incurred by accepting the Penny-Wise order?
2) Ignore the Penny-Wise order, what would be the total expected profit (loss) incurred by accepting the Star-Mart order?