Cost Data for Financial Reporting and Special OrderDecisions

Friendly Greeting Card Company produces a full range ofgreetings cards sold through pharmacies and department stores. Eachcard is designed by independent artists. A production master isthen prepared for each design. The production master has anindefinite life. Product designs for popular cards are deemed to bevaluable assets. If a card sells well, many batches of the designwill be manufactured over a period of years. Hence, FriendlyGreeting maintains an inventory of production masters so that cardmay be periodically reissued. Cards are produced in batches thatmay vary by increments of 1,000 units. An average batch consists of10,000 cards. Producing a batch requires placing the productionmaster on the printing press, setting the press for the appropriatepaper size, and making other adjustments for colors and so forth.Following are facility-, product-, and unit-level costinformation:

Product design and production master per new card…………… $2,000.00

Batch setup (typically per 10,000cards)………………………….       200.00

Materials per 1,000cards…………………………………………..      100.00

Conversion per 1,000cards………………………………………..        80.00

Shipping

   Perbatch…………………………………………………………...        25.00

   Percard…………………………………………………………….          0.02

Selling and administrative

   Companywide…………………………………………………….. 200,000.00

   Per product designmarketed……………………………………        500.00

Previous year

Products designs and masters prepared for newcards………..               90

Product designsmarketed…………………………………………             120

Batchesmanufactured……………………………………………..             500

Cards manufactured and solid…………………………………….   5,000,000

Required

a.         Describe howyou would determine the cost of goods sold and the value of anyending inventory for financial reporting purposes. (No computationsare required.)

b.         You have justreceived an inquiry from Walgreens stores to develop andmanufacture 20 special designs for sale exclusively in Walgreensstores. The cards would be sold for $1.50 each, and Walgreens wouldpay Friendly Greeting $0.35 per card. The initial order is for20,000 cards of each design. If the cards sell well, Walgreensplans to place additional orders for these and other designs.Because of the preestablished sales relationship, no marketingcosts would be associated with the cards sold to Walgreens. Howwould you evaluate the desirability of the the Walgreensproposal?

c.         Explain anydifferences between the costs considered in your answer torequirements (a) and the costs considered in your answers torequirements (b).