Question

Diamond Corporation produces baseball bats for kids that it sells for $30 each. At capacity, the company can produce 50,000 bats a year. The costs of producing and selling 50,000 bats are as follows: : (Click to view the costs.) Read the requirements. Requirement 1. Suppose Diamond is currently producing and selling 36,000 bats. At this level of production and sales, its fixed costs are the same as given in the preceding table. Gehrig Corporation wants to place a one-time special order for 14,000 bats at $21 each. Diamond will incur no variable selling costs for this special order. Should Diamond accept this one-time special order? Show your calculations. Determine the effect on operating income if the order is accepted. (Enter decreases in operating income with parentheses or a minus sign.) Increase (decrease) in operating income if order is accepted

Answer 1

Since there is spare capacity, no additional fixed costs will be incurred for the purpose of this order

Revenue from special order = 14000*21 =$294,000

Less: variable manufacturing costs = 14000*(13+2+1) =$224,000

Increase in operating income =$70,000

2.incremental income from special order =$70,000

Less: lost contribution margin from regular sales =14000*(30-17) =$182,000

Increase in operating income =$(112,000)

Indifference price = selling price to outside customers- variable selling cost saved

= 30-1

=$29 per bat

C other factors are

Effect of special order on regular sales

Potential of future expansion

Long term relationship with the special order customer