Question

Case — Puppy Grow Ltd.

Puppy Grow Ltd (Puppy Grow) manufactures dog food and because of the quality often receives special orders from kennels and dog breeders. For each type of dog food sold, each bag is carefully filled to have the precise mix of components advertised for that type of dog food. Puppy Grow’s operating capacity is 22,000 25-kilogram bags per month, and it currently is selling 20,000 bags manufactured in 20 batches of 1,000 bags each. The firm just received a request for a special order of 5,000 25 kilogram bags of dog food for $125,000 from Friendly Kennels. The production costs would be the same, although delivery and other packaging and distribution services would cause a one-time $2,000 cost for Puppy Grow. The special order would be processed in two batches of 2,500 bags each. The following information is provided about Puppy Grow’s current operations:

Sales and production cost data for 20,000 bags, per bag

Sales price   $38

Variable manufacturing costs   15

Variable marketing costs        2

Fixed manufacturing costs     12

Fixed marketing costs    2

No marketing costs would be associated with the special order. Since the order is required for the breeding of a special breed of dog, Puppy Grow must fill the entire order of 5,000 bags.

Required:

a What is the total relevant cost of filling this special sales order?                 

b Should Puppy Grow accept the special order? Explain why or why not.            

c What would be the change in operating income if the special order is accepted?  

d Would your answer to part (a) above change if the company has a capacity of 25,000 25-kilogram bags per month? Explain.   

e Suppose that Puppy Grow accepted the special order but found that unexpected production delays would not allow it to supply all 5,000 bags from its own plants and still meet the promised delivery date. Puppy Grow can provide the same materials by purchasing them in bulk from a competing firm. The materials would then be repackaged into Puppy Grow bags to complete the order. Puppy Grow knows the competitor’s materials are of very good quality but it cannot be sure that the quality meets its own exacting standards. There is not enough time to carefully test the competitor’s product to determine its quality. What should Puppy Grow do?

f Discuss four important limitations of relevant cost analysis.                                  

Answer 1