Question

Tyrex Corporation, located in New York, USA manufactures high quality porcelain shot glasses. The company has the capacity to produce 8,000 shot glasses per month. Current monthly demand is for 7,000 shot glasses at $25.00 per glass. The company pays a sales commission of 2% of its selling price. The cost data for the shot glass are as follows:

Variable product costs

Direct Material    $4 per glass

Direct Labour     $1.50 per glass

Manufacturing overhead costs      $1 per glass

Fixed Costs

Manufacturing overhead costs $84,000 per year

Recently, the 2020 Tokyo Olympic Games organising committee approached the Tyrex management. The committee expressed an interest in using Tyrex shot glasses to make commemorative shot glasses for the 2012 games. The order will be for 6,000 shot glasses, equally spread over four months. The offer price is $20 per glass. Each glass will require a special gold rim and a logo certifying official Olympic merchandise. Tyrex’s production manager estimated that the gold rim will cost $6 per glass and the embossing plate for the logo will cost $8,000. In addition, due to strict copyright concerns related to Olympic merchandise, Tyrex will have to hire an additional security person at a monthly salary of $1,000 for the four months of Olympic glass production period. Other variable costs related to the logo will be $1.00 per glass. There are no selling or other costs related to the order.

Required

(a) Assume Tyrex accepts the special order for 6,000 shot glasses. Calculate the impact on the operating income of the company for the fourmonths Olympic glass production period.

(b) List two other factors that should be considered by Tyrex before making the final decision whether to accept the special offer

(c) The CEO of Tyrex Corporation has decided to accept the Olympic order. He negotiated with a porcelain shot glass supplier to supply 500 shot glasses per month during the next four months at $15 per glass. The CEO plans to use these shot glasses solely to fulfill the regular orders that are impacted by the special order. Should the CEO accept the offer from the supplier? Explain and support your answer with computations.

(d) If Tyrex accepts the special order as well as the offer from the supplier, what is the net financial impact (compared to the current operating income)?

Answer 1