Question

Taino Computers, Inc. makes a variety of computers. One of these products is a Game Console model: Yukiyu-XL. This model includes the ultimate in technology and is in strong demand. Expected demand for this year is 35,000 units. Full production capacity for Yukiyu-XL is 40,000 units, but 35,000 units are considered normal capacity. The following unit price and breakdown is applicable in 2019:

	Per unit
Sales Price	$350.00
Less manufacturing costs:
Materials	$86.00
Direct Labor	$35.00
Overhead: Variable	$25.00
Fixed	$20.00
Total manufacturing costs	$166.00
Gross Margin	$184.00
Less selling and administrative expenses:
Selling: Variable	$5.00
Fixed	$20.00
Administrative, Fixed	$15.00
Super Taino Game, variable*	$23.00
Total selling and administrative expenses	$63.00
Net Profit before taxes	$121.00

*Different Options for Console games are available:

Super Taino Game $23

Caribe Game $15

Azteca Kingdom $11

During November, the company received 3 special orders request from: Castco, Sims, and Good Buy. These orders are not part of the budgeted 35,000 units sales of Yukiyu-XL for 2019, but there is sufficient capacity for possibly one order to be accepted. Orders received and their terms are:

Order form Castco: 2,500 units at $350 per unit with Azteca Kingdom $11 per unit.

Order form Sims: 3,500 units at $400 per unit with Caribe Game $15 per unit.

Order form Good Buy: 3,000 units at $410 per unit with Super Taino Game $23 per unit.

Since these orders were made directly to Taino Computers, Inc., no variable selling costs will be incurred.

1. Analyze the profitability of each of these three special orders.
2. Which special order should be accepted?
3. What other aspects need to be considered in addition to profitability?

Answer 1

(a)

(b) Special order from SIms should be accepted.

(c) Other aspects needed to be considered in addition to profitability are:

1. The credit worthiness of the person purchasing the product i.e. will the buyer be able to compensate for the selling price of the product if the sales are made with some credit period.
2. Impact on current selling price: The special order should not affect the current sales i.e. the current customers should not demand for a reduction in price if the price of special order is below the regular selling price.
3. There must be some spare capacity for the special order after fulfilling the regular demand in the market.