Question

Sounds Extreme Inc.

Sounds Extreme Inc. (“Sounds”) sells high quality hearing protection.

Sounds most popular product is a set of ear plugs designed for smaller ear sizes, offered in 5 different colours. The production process involves both forming and laser cutting. Sounds has a monthly production capacity of 400 hours on the forming machine and 1,200 hours on the laser machine. Both machines are operating at 85% capacity every month to satisfy demand from existing customers. The direct labour rate per hour is $20 for forming and $25 for cutting.

The revenue and costs per unit for a pair of ear plugs is provided below.

Selling price		$80.00
Costs:
Direct materials	$5.00
Direct labour – forming	5.00
Direct labour – laser cutting	18.75
Variable overhead	10.00
Fixed overhead	12.50
Variable selling expenses	5.00
Fixed selling expenses	3.25	59.50
Operating profit		20.50

On August 1, 2020, Sportsco, a retailer of recreation equipment, contacts the production manager of Sounds with a special order. Sportsco requires 600 sets of ear plugs by October 31, 2020.

The production manager determined that Sounds would be ready to produce the sets for Sportco beginning September 1, 2020. This allows 2 months to fulfill the order.

Sportco has offered a price of $65 per set of ear plugs. No variable selling costs will be incurred on the order.

When the production manager presents the offer to the sales manager of Sounds, the sales manager is prepared to reject the special order. In the sales manager’s view, the sales price offered by Sportsco is $15 below the sales price charged to a regular customer of Sounds. Therefore, profits would decrease by 600 x $15 = $9,000.

Required:

Prepare an analysis of the special order for the sales manager. Include both quantitative and qualitative analysis.

Answer 1