ACCT 5131 Collected Homework Assignment 3

ACCT 5131

Collected Homework Assignment #3

See the Course Schedule in the syllabus for the due date.  Put your answer underneath each question.  You may either type your answers in a Word file or write them neatly.  However, to receive credit, your work must be easy to follow and your writing must be readable. 

Assignment

BallCards Inc. sells baseball cards in packs of 15 in drugstores and convenience stores throughout the country.  It is the third leading firm in the industry.  BallCards has been approached by Pennock Cereal Inc., which would like to order a special edition of cards to use as a promotion with its cereal.  BallCards would be solely responsible for designing and producing the cards.  Pennock wants to order 25,000 sets and has offered $23,750 for the order.  Each set will consist of 33 cards.  BallCards currently produces cards in sheets of 132.

Production, marketing, and other costs (per sheet):                                                  

      Variable costs (per sheet)

            Direct materials.................................................................................... $1.20

            Direct labor............................................................................................. 0.20

            Variable overhead................................................................................... 0.40

            Variable marketing................................................................................. 0.10

      Fixed costs (average per sheet)

            Fixed overhead....................................................................................... 0.15

            Fixed marketing...................................................................................... 0.35

            Insurance, taxes, and administrative salaries.......................................... 0.10

Costs for special order (total):

      Design......................................................................................................... 2,000

      Order setup costs........................................................................................ 5,500

BallCards would incur no marketing costs for the special order.  It has the capacity to accept this special order without interrupting regular production.

Total sets ordered -  25,000

Cards in one set - 33

 Total cards ordered -  25,000(33) = 825,000 cards

One sheet produces 132 cards. Total sheets required = 825,000/132 = 6,250 sheets

Total order price .......................................................................................... $23,750

Variable costs

Direct materials (1.2*6,250)...................................................................... $7,500(-)

Direct labor (0.20*6,250)........................................................................... $1,250(-)

Variable overhead (0.4*6250).................................................................... $2,500(-)

Contribution................................................................................................. $12,500

Fixed cost: (design).................................................................................... $2,000(-)

Set up cost................................................................................................... $5,500(-)

Profit from order............................................................................................ $5,000

Required:

1. Is the current operating profit relevant in BallCards’ decision on whether to accept the special order?  Why or why not?

Yes, current operating profits are relevant in accepting the special order. Fixed costs are consistent. Operating profits are positive. The special order should be accepted.

2. What are the number sheets that BallCards must produce for the special order?

One sheet produces 132 cards. Total sheets required = 825,000/132 = 6,250 sheets

3. What is the short-term effect on operating profit if BallCards accepts the special order?

Calculated in table above- profit will increase by $5,00

4. What special order offer price by Pennock would allow BallCards to breakeven on the order?

Break even point would be $18,750

$ 23,750 – 5,000 = 18,750

5. Briefly discuss two important strategic issues that BallCards needs to consider in deciding whether to accept the special order.

- Original card set is a set of 15 cards. Special order set is 33 cards. Could the regular customers of BallCards’ be upset about this change? Or could it become something that customers like and this turns into a regular collaboration versus a special order.

-What effect will a pack of 33 cards have or cost of packaging and on production. Could it reduce production time? And would the cost of creating new packaging increase?