90.2K

Verified Solution

Link Copied!

The Bancroft Company manufacturesskateboards. Several weeks ago, the firm received a special-orderinquiry from the Kiger company. Kiger wants to market a skateboardsimilar to one of Bancroft’s models and has offered to purchase11,000 units if the order can be completed in three months. Thecost data for Bancroft’s model no. 5 skateboard follows:

Cost

Direct material(per unit) $8.20

Direct labor(per unit) $2.25

Total manufacturing overhead (per unit)$10.00

Total (per unit) $20.45

Additional Data:

• The normal selling price of model no. 5 is $26.50; however,Kiger has offered Bancroft only $15.75 because of the largequantity it is willing to purchase.
• Kiger requires a modification of the design that will allow a$2.10 reduction in direct material cost.
• Bancroft’s production supervisor notes that the company willincur $3,700 in additional setup costs and will have to purchase a$2,400 special device to manufacture these units. The device willbe discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production atthe rate of $20 per machine hour. This figure is based, in part, onbudgeted yearly fixed overhead of $750,000 and planned productionactivity of 60,000 machine hours (5,000 per month).
• Bancroft will allocate $1,800 of existing fixed administrativecosts to the order as “…part of the cost of doing business.”

Please answer the following questions about thecase:

1. Assume that present sales will not be affected by the order.Should the order be accepted from a financial point of view (i.e.,is it profitable?) Why or why not? Show your calculations.
2. Assume that Bancroft’s current production activity consumes 70%of planned machine-hour activity. Can the company accept the orderand meet Kiger’s deadline?
3. What options might Bancroft consider if management truly wantedto do business with Kiger in hopes of building a long-termrelationships with the firm?