Question

Garcia Furniture Company is a very profitable furniture manufacturer,
but it always has enough idle capacity to process special orders or re-work on existing orders.
Though it manufactures standard tables and chairs, it has sufficient manufacturing flexibility to
accommodate occasional custom orders.

In January, it receives a custom order from Gustavo Entertainments to deliver 150 handicapped-
accessible tables with motors (for height adjustment) at $100/unit. Gustavo Entertainments made

a $4,000 non-refundable deposit towards the order. Garcia incurred following cost in completing
this order:

Cost

Handicapped
Accessible Table
Direct Materials.................................................... $20
Direct Labor ......................................................... 8
Variable Manufacturing Overhead ............................ 12
Share of Fixed Manufacturing Overhead .................... 16
Variable Selling (commission) cost ......................... 4
Share of Fixed Selling & Administrative cost ............. 10
Cost (per unit) ...................................................... $70
Just after the production was completed, Gustavo Entertainments cancelled the order, and forfeited
(lost) the deposit. Garcia started considering alternatives to selling these handicapped accessible
tables.

Answer the following questions.
A. Odds-n-Ends, a deep discount retailer, offers Garcia Furniture Company $5,500 to buy
the entire lot of 150 handicapped accessible tables. There will be a flat commission of
$300 for this sale.
If this is the only alternative available to Garcia Furniture Company, should they accept
this offer? If not, what is the minimum it should be willing to take for this order?

B. A sales agent of Garcia approaches New Age Inc., a new customer to buy these
handicapped accessible tables. New Age Inc. makes an offer of $7,000, provided the
height adjustment feature (with motors) was removed. The sales agent agrees to take a flat
commission of $350 for this order. Production manager provided following estimate of
the total cost to re-work on the tables to meet this customer’s requirements:

Cost Dollars
Direct Materials ……………………………. $0.50
Direct Labor ……………………………...... 3.00
Variable Manufacturing Overhead………. 4.50
Share of Fixed Manufacturing Overhead 4.00
Cost (per unit) ……………………………. $12.00

If these are the only two alternatives available to Garcia Furniture Company, what should
they do with the handicapped accessible tables?
1. Sell the handicapped accessible tables to Odds-n-Ends, as is, for $5,500 (part A).
2. Modify and sell the handicapped accessible tables to New Age Inc. for $7,000 (part B).
3. Reject both the offers.

C. Garcia Furniture manufacturers standard tables. The cost of producing standard table is
given below:
Cost Standard Table
Direct Materials……………………………………. $13
Direct Labor ……………………………………….. 5
Variable Manufacturing Overhead ……………… 10
Share of Fixed Manufacturing Overhead ……... 18
Variable Selling (commission) cost ……………. 3
Share of Fixed Selling & Administrative cost … 11
Cost (per unit) ……………………………………. $60
The standard table sells for $62 per unit. New Age Inc. is a regular customer and will have
to buy standard tables to meet its needs, if Garcia chooses to reject their offer to buy
modified handicapped accessible tables (in part B above).
Garcia is operating well below its capacity and can easily manufacture up to 500 additional
units, if needed. Given this new information, should Garcia Furniture change its decision
from what was made in part B above? If yes, what should Garcia do with the handicapped
accessible tables?
1. Sell the handicapped accessible tables to Odds-n-Ends, as is, for $5,500 (part A) and
sell standard tables to New Age Inc.
2. Modify and sell the handicapped accessible tables to New Age Inc. for $7,000 (part B).
3. Reject both the offers on handicapped accessible tables.

D. Are there any differences between customers like Odds-n-Ends, and New Age Inc. that
need to be taken into consideration by the management of Garcia Furniture Company in
making these decisions.

Answer 1

Garcia Furniture has already manufactured 150 handicapped-accessible tables. All the costs related to production will be sunk costs and hence irrelevant.

Hence, if only option A is available, it should be accepted as the net benefit is positive.

The share of Fixed Costs is an allocation of cost and hence irrelevant.

If only option A and B are available, B should be accepted as the net benefit is more in the scenario.

Since the net benefit is higher in C than B, the company should opt for selling the standard tables to New Age Inc.

Hence Garcia Furnitures should opt for A and C to ensure maximum benefits.

D- Odds and Ends is a deep discount retailer and usually purchase at a price comparatively lower to the market price. They should be only approached if there is not a ready market for the product in the market.

New Age Inc is a new customer and hence factors like liquidity, creditworthiness and market reputation should be considered before making the sales.