Question

Case 2

Slugger Corporation produces baseball bats for kids that it sells for $36 each. At capacity, the company can produce 50,000 bats a year. The costs of producing and selling 50,000 bats are as follows:

	Cost per Bat	Total costs
Direct materials	$13	$650,000
Direct manufacturing labor	5	250,000
Variable manufacturing overhead	2	100,000
Fixed manufacturing overhead	6	300,000
Variable selling expenses	3	150,000
Fixed selling expenses	8	100,000
Total costs	$31	$1,550,000

Additional information:

Suppose Slugger is currently producing and selling 40,000 bas. At this level of production and sales, its fixed costs are the same as given in preceding table.

Bench Corporation wants to place a one-time special order for 10,000 bats at $23 each.

Suppose Slugger will incur no variable selling costs for this special order.

Required:

Q2-1. Describe the decision for Slugger to make.

Q2-2. List all assumptions when Slugger makes the special order decision.

Q2-3. Should Slugger accept this one-time special order? Show your calculations and clearly identify relevant revenues and costs information.

Q2-4. What other impact should Slugger consider in deciding whether to accept this special order?

Answer 1

part 2-1

currently, the company has production capacity of producing 50000 bats and its current production is 40000 bats. So it has idle capacity of 10000 bats. So, by making use of this idle capacity it can accept the one-time special order of Bench corporation. Thus, he should make positive decision.

Part 2-2

assumptions related to Slugger's special order decision are as follows:

- there will no selling expenses related to special order

- there will no fixed costs related to special order

part 2-3

Revenues from special order ($23×10,000 bats)	230000
Variable manufacturing costs ($20 ×10,000 bats) (13+5+2 = 20)	(200000)
Increase in operating income	30000

Slugger should accept this one-time special order if this order is accepted there is increase of $30000 in operating income.

Part 2-4

other important thing, that Slugger should consider before taking decision regarding the acceptance of this special order is that the regular customers should not be suffering in any way by the acceptance of this order. The quality of goods offered should remain same and delivery of goods should be done on time. the treatment to regular customers should remain the same as before the acceptance of this special order.