Question

Jupiter Corporation manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires to market a skateboard similar to one of Jupiter’s and has offered to purchase 11,000 units if the order can be completed in three months. The cost data for Jupiter’s model no. 43 skateboard follow.

Direct material	$	8.20
Direct labor: 0.25 hours at $9.00		2.25
Total manufacturing overhead:
0.5 hours at $20		10.00
Total	$	20.45

Additional data:

• The normal selling price of model no. 43 is $26.50; however, Venus has offered Jupiter only $15.75 because of the large quantity it is willing to purchase.
• Venus requires a modification of the design that will allow a $2.10 reduction in direct-material cost.
• Jupiter’s production supervisor notes that the company will incur $3,700 in additional setup costs and will have to purchase a $2,400 special device to manufacture these units. The device will be discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production at the rate of $20 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5,000 per month).
• Jupiter will allocate $1,800 of existing fixed administrative costs to the order as “... part of the cost of doing business.”

1. 2-a. Assume that Jupiter’s current production activity consumes 70 percent of planned machine-hour activity. Calculate the current available machine-hours.
2. 2-b. Can the company accept the order and meet Venus’ deadline?
3. What options might Jupiter consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm?

Answer 1

2(a)Current available machine-hours.
Planned Machine Hours	15000	5000 per month * 3 Months
Less: Current usage for production	10500	15000*70%
Available Hours	4500
2(b) Can the company accept the order and meet Venus’ deadline?
Macine Hours Required	5500	11000*0.5
Available Hours	4500	Computed above				9
Since the required machine hour is greater than available machine hour the company cannot accept the order as there is no sufficient capacity for accepting the same.
What options might Jupiter consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm?
i) Jupitar can sell to Venus by cutting its current business in hopes of building a long-term relationship with the firm
ii) It can outsource the Units
iii) It can motivate its employees for overtime
iv) It can also install additional capacity to meet the demand

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