Question

Speedy Sports manufactures footballs and has the capacity to produce 80,000 balls per year. Budgeted information for the current year is as follows:

Expected sales (80,000 units) Direct Materials

Direct Labour

Manufacturing overhead

$400,000

$ 100,000 $ 80,000 $ 120,000

They have been approached by a major football team, PSB United, with a request for a special order of 10,000 balls. Because of the large order being placed, PSB are only willing to pay $4 per ball for the special order.

PSB United requires the balls to be stamped with their team logo which will require the purchase of a special machine for $10,000. After Speedy Sports completes the special order they will have no further use for the machine.

In addition, the logo will require a special coloured dye which will add $0.25 to the materials cost per ball.

The budgeted manufacturing overhead is based, in part, on budgeted annual fixed manufacturing overhead of $100,000.

In the middle of the year, prior to PSB requesting the special order, management had estimated that annual sales would amount to only 70,000 units.

Required:

1. Jill,thetraineeaccountantatSpeedySports,wasaskedtodoapreliminary analysis and recommends rejecting the special order because it would result in a financial loss. Do you agree with Jill?

2. ExplainhowJillmayhavearrivedatherconclusionthatthespecialorder would result in a financial loss. Also explain the error in Jill’s approach that you have just outlined.

3. Refer to part (1). Identify and elaborate on three qualitative factors, specific to the case facts, which you would recommend be considered by Speedy Sports.

4. Nowassumethatwhenmanagementdidtheirmid-yearanalysis,Speedy Sports was on track to reach their expected sales, what would you recommend the firm do with regard to the special order? You must show relevant calculations, AND explain the logic underpinning your calculations.

Answer 1

Answer :

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