Jazzy Cases manufactures several different styles of jewelry cases. Management estimates that during the first quarter of this year the company will operate at about 80% of normal capacity. Two special orders have been received, and management is making a decision about whether to accept either or both orders. 

The first order is from Penny-Wise Department Stores. The manager would like to market a jewelry case similar to one of Jazzy’s current models. Penny-Wise wants its own label on the cases and is willing to pay $5.75 per case for 20,000 cases to be shipped by April 1. The cost data for Jazzy’s case, which is similar to the requested case, follow:

Selling price per unit ………………….......……..           $9.00

Cost per unit

Raw materials ……………………………..........….            $2.50

Direct labor (0.25 hrs. X $12) …………....……              3.00

Overhead (0.25 machine hrs. X $4) …………            1.00

Total cost per unit …………………………........…          $6.50

According to the specifications supplied by Penny-Wise, the special order case requires less expensive raw materials. Therefore, the raw materials for the special order will cost $2.25 per case. Management believes that the rest of the costs, labor time, and machine time will remain the same as forJazzy’s case.

The second order is from the Star-Mart Company. Its managers want 8,000 cases for $7.50 per case. These jewelry cases, to be marketed under the Star-Mart label, would also need to be shipped by April 1. However, these cases are somewhat different from any cases currently manufactured by Jazzy. Following are the estimated unit costs:

Cost per unit

Raw materials ………………………..............……     $3.25

Direct labor (0.25 hrs. X $12) ……….......…...       3.00

Overhead (0.5 machine hrs. X $4.00) …...…      2.00

Total cost per unit ………………………..............    $8.25

In addition to these per-unit costs, Jazzy would incur $1,500 in setup costs and would need to purchase $2,500 in special equipment to manufacture these cases. Currently, Jazzy would have no other use for the equipment once this order was filled.

Jazzy’s capacity constraint is total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year, or 7,500 hours per month. Fixed manufacturing overhead costs are allocated to production on the basis of machine hours at $4.00 per hour and are budgeted at $360,000 per year.

Jazzy can work on the special orders throughout the entire first quarter, in addition to performing its normal production. Jazzy’s managers do not expect any repeat sales to be generated from either special order.

ANALYZE INFORMATION:

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.

A. What is the excess capacity of machine hours available in the first quarter? Explain how machine-hour capacity affects the special order decision.

B. Ignore the Star-Mart order. Using the general decision rule, what is the minimum acceptable price for the Penny-Wise order?

C. Ignore the Penny-Wise order. What is the contribution margin per case for the Star-Mart order? What would be the total expected profit (loss) incurred by accepting this order?

D. Using only quantitative information, decide which special orders Jazzy should accept.

E. What qualitative factors are likely to be important to this decision?

F. Identify and explain business risks that affect Jazzy’s decision.

G. What might happen to costs if Jazzy’s production exceeds 95% of its capacity?

Discuss how increased use of capacity from a special order might affect the company’s costs.

REQUIRED

Suppose you are the cost accountant for Jazzy. Turn in your answers to the following.

H. Write a memo to Jazzy’s management recommending whether the company should accept each of the special orders. Attach to the memo a schedule showing your computations. As appropriate, refer to the schedule in the memo.

I. Write one or two paragraphs explaining how you decided what information to include in your memo.