Question

Accounting Problem

BallCards Inc. sells baseball cards in packs of 15 in drugstores and convenience stores throughout the country. It is the third leading firm in the industry. BallCards has been approached by Pennock Cereal Inc., which would like to order a special edition of cards to use as a promotion with its cereal. BallCards would be solely responsible for designing and producing the cards. Pennock wants to order 25,000 sets and has offered $23,750 for the order. Each set will consist of 33 cards. BallCards currently produces cards in sheets of 132.

Production, marketing, and other costs (per sheet):                                                  

      Variable costs (per sheet)

            Direct materials.................................................................................... $1.20

            Direct labor............................................................................................. 0.20

            Variable overhead................................................................................... 0.40

            Variable marketing................................................................................. 0.10

      Fixed costs (average per sheet)

            Fixed overhead....................................................................................... 0.15

            Fixed marketing...................................................................................... 0.35

            Insurance, taxes, and administrative salaries.......................................... 0.10

Costs for special order (total):

      Design......................................................................................................... 2,000

      Order setup costs........................................................................................ 5,500

BallCards would incur no marketing costs for the special order. It has the capacity to accept this special order without interrupting regular production.

Required:

1.   Is the current operating profit relevant in BallCards’ decision on whether to accept the            special order? Why or why not?

2.   What are the number sheets that BallCards must produce for the special order?

3.   What is the short-term effect on operating profit if BallCards accepts the special order?

4.   What special order offer price by Pennock would allow BallCards to breakeven on the order?

5.   Briefly discuss two important strategic issues that BallCards needs to consider in deciding      whether to accept the special order.

Answer 1

(1): No, the current operating income is not relevant as special order analysis involves incremental analysis and so we will have to determine the impact of the special order on the operating income by considering the relevant costs i.e. costs that will change. Here fixed costs will not change and hence will not be included in the calculations.

(2): Total no. of cards required = 25,000 sets*33 cards per set = 825,000 cards. No. of sheets = 825,000/132 = 6,250 sheets

(3): Relevant costs are:

Direct material	1.20
Direct labor	0.20
Variable overhead	0.40
Total	1.80

Thus total cost = ($1.80 per sheet * 6,250 sheets) + 2,000 (design costs) + 5,500 (order set up costs) = $18,750

Now total cost per set = $18,750/25000 = $0.75 per set

Price per set = $23,750/25000 = $0.95 per set

Thus short term effect is that operating profit will go up.

(4): At break even total cost = total price (as there is no profit). As computed in (3) above total cost per set = $0.75 and hence the offer price will be $0.75 per set or a total of $0.75*25000 = $18,750

(5): The strategic issues that BallCards needs to consider in deciding whether to accept the special order are:

(i): Can the special order lead to establishing long term business relationship with Pennock Cereal?

(ii): Will processing the special order have any impact on quality or schedule of current production?