Question

Baldwin Golf Co. produces golf equipment including a golf bag that sells for $200. Although the company's production capacity is 5,000 bags per year, only 4,000 bags are currently being produced and sold. The production costs for 4,000 bags are as follows:

Unit-level material cost ($100 per bag)                                         $400,000

Unit-level labor cost ($50 per bag)                                                 $200,000

Unit-level overhead cost ($12.00 per bag)                                      $ 48,000

Batch-level set-up costs ($4,000 per batch of 1,000 bags)             $ 16,000

Product-level costs per year (golf bag advertising; fixed cost)    $ 15,000

Allocated portion of facility costs (annual factory lease cost)      $ 30,000

Golf Mart Stores is not one of Baldwin’s regular customers. Golf Mart has made an offer to Baldwin to purchase 1,000 golf bags as a one-time special purchase at a price of $170 per bag.

Required:
a) Prepare a quantitative analysis that indicates whether the special order should be accepted or rejected.

b) Identify at least one qualitative factor which Baldwin Co. should consider in this special order decision?

Answer 1

(a) -- Prepare a quantitative analysis that indicates whether the special order should be accepted or rejected.

Answer -

Statement showing the incremental net operating income or (loss) from accepting the special order

	Particulars	Calculations / Reasons
A.	Sale price per bag for special order	Given in question	$170
	Cost per bag
	Unit-level material cost per bag	Given in question	$100
	Unit-level labor cost per bag	Given in question	$50
	Unit-level overhead cost per bag	Given in question	$12
	Batch-level set-up costs per bag	[$4000 per batch / 1000 bags]	$4
	Product-level costs per year (golf bag advertising; fixed cost)	Not incremental, so irrelevant	0
	Allocated portion of facility costs (annual factory lease cost)	Not incremental, so irrelevant	0
B.	Total cost per bag	[$100 + $50 + $12 + $4]	$166
C.	Incremental net operating income per bag [A - B]	[$170 - $166]	$4
D.	Incremental net operating income for 1000 bags	[1000 bags * $4]	$4000
Therefore, the special order should be Accepted

.

(b)-- Identify at least one qualitative factor which Baldwin Co. should consider in this special order decision?

Answer -

Qualitative factor which Baldwin Co. should consider in this special order decision -

1) Impact on reputation if regular customers find out about the special price.

2) The special order impact on sales to regular customers.