Sounds Extreme Inc.
Sounds Extreme Inc. (“Sounds”) sells high qualityhearing protection.
Sounds most popular product is a set of ear plugsdesigned for smaller ear sizes, offered in 5 different colours. Theproduction process involves both forming and laser cutting. Soundshas a monthly production capacity of 400 hours on the formingmachine and 1,200 hours on the laser machine. Both machines areoperating at 85% capacity every month to satisfy demand fromexisting customers. The direct labour rate per hour is $20 forforming and $25 for cutting.
The revenue and costs per unit for a pair of ear plugsis 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 recreationequipment, contacts the production manager of Sounds with a specialorder. Sportsco requires 600 sets of ear plugs by October 31,2020.
The production manager determined that Sounds would beready 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 theorder.
When the production manager presents the offer to thesales manager of Sounds, the sales manager is prepared to rejectthe special order. In the sales manager’s view, the sales priceoffered by Sportsco is $15 below the sales price charged to aregular customer of Sounds. Therefore, profits would decrease by600 x $15 = $9,000.
Required:
Prepare an analysis of the special order for the salesmanager. Include both quantitative and qualitativeanalysis.
