Question

Now suppose Diamond is currently producing and selling 54 comma 000 bats. If Diamond accepts Home Run​'s offer it will have to sell 10 comma 000 fewer bats to its regular customers.​ (a) On financial considerations​ alone, should Diamond accept this​ one-time special​ order? Show your calculations.​ (b) On financial considerations​ alone, at what price would Diamond be indifferent between accepting the special order and continuing to sell to its regular customers at $ 37 per​ bat? (c) What other factors should Diamond consider in deciding whether to accept the​ one-time special​ order?

Answer 1

a)

Statement of Incremental Profit

If Special Order is Accepted - 10,000 Bats

Incremental Income

Sales Revenue - 10,000 Nos X $21 210,000.00

Savings of Variable Selling Expense - 10,000 Nos X $2 20,000.00 230,000.00

Incremental Cost:

Direct Materials - 10,000 Nos X $14 140,000.00

Direct Labor - 10,000 Nos X $4 40,000.00

Variable MOH - 10,000 Nos X $2 20,000.00

Loss of Contribution on Normal sales - 10,000 Nos X $15 150,000.00 350,000.00

Incremental Profit (Loss) (120,000.00)

Contribution Margin per Bat - Normal sales = $37 - ($14 + $4 + $2 + $2)

Contribution Margin per Bat - Normal sales = $15

No, Diamond Corporation should not accept the Order.

b)

Special order Price per Unit = Incremental Cost + Contribution Lost per Unit

Incremental Cost = $14 + $4 + $2 = $20

Contribution Lost per Unit = $37 - ($14 + $4 + $2 + $2)

Contribution Lost per Unit = $15 per unit

Special order Price per Unit = $20 + $15

Special order Price per Unit = $35 per Unit

c)

The other factors to be considered before accepting the order are:

1. Effect of on relationship between the existing customers.

2. Whether the order is a one time or can be repeated in future.