Question

The Bancroft Company manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from the Kiger company. Kiger wants to market a skateboard similar to one of Bancroft’s models and has offered to purchase 11,000 units if the order can be completed in three months. The cost data for Bancroft’s model no. 5 skateboard follows:

COST	PER UNIT
Direct material	$8.20
Direct labor	$2.25
​​​​​​​Total manufacturing overhead	$10.00
Total	$20.45

Additional Data:

• The normal selling price of model no. 5 is $26.50; however, Kiger has offered Bancroft only $15.75 because of the large quantity it is willing to purchase.
• Kiger requires a modification of the design that will allow a $2.10 reduction in direct material cost.
• Bancroft’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).
• Bancroft will allocate $1,800 of existing fixed administrative costs to the order as “…part of the cost of doing business.”

Please answer the following questions about the case:

1. Assume that present sales will not be affected by the order. Should the order be accepted from a financial point of view (i.e., is it profitable?) Why or why not? Show your calculations.
2. Assume that Bancroft’s current production activity consumes 70% of planned machine-hour activity. Can the company accept the order and meet Kiger’s deadline?
3. What options might Bancroft consider if management truly wanted to do business with Kiger in hopes of building a long-term relationships with the firm?

Answer 1

Ans 1
Increase in revenue (15.75*11000)			173250
Less:
Direct material (8.2-2.1)*11000)	67100
Direct labor 2.25*11000	24750
Variable overhead rate (3.75*11000)	41250	133100
Additional setup cost		3700
Special device		2400
Fixed administrative cost		1800	141000
Increase in income			32250
working
Variable overhead rate (10-5.25)	3.75
.5 machine hour is used 10/20
Fixed overhead 750000/60000	12.5
per .5 hour (12.5*.5)	6.25
It should be accepted as the profit increase by $32250
ans 2
Excess machine hour available
(5000*3 months)*30%	4500
Machine hours needed is 11000*.5	5500
No, it cannot complete with its idle capacity as 1000 more machine hours
are needed. The way is to forego the current sales
ans 3
The options that can be considered:
1) It has to forgone the current sale by 2000 units.
2) It could have long term contract and could say to increase the selling price in future.
3) It can also outsource some work to outside agency.
If a ny doubt please comment