Question: St Tropez S A manufactures several different styles of jewelry cases

St. Tropez S.A. manufactures several different styles of jewelry cases in southern France. Management estimates that during the second quarter of 20X1 the company will be operating at 80% of normal capacity. Because the company desires a higher utilization of plant capacity, it will consider a special order.
St. Tropez has received special-order inquiries from two companies. The first is from Lyon, which would like to market a jewelry case similar to one of St. Tropez’s cases. The Lyon jewelry case would be marketed under Lyon’s own label. Lyon has offered St. Tropez €67.5 per jewelry case for 20,000 cases to be shipped by July 1, 20X1. The cost data for the St. Tropez jewelry case, which would be similar to the specifications of the Lyon special order, are as follows:
Regular selling price per unit ... €100
Costs per unit:
Raw materials ............. € 35
Direct labor, .5 hour at €60 ..... 30
Overhead, .25 machine hour at €40 . 10
Total cost per unit ....... € 75

According to the specifications provided by Lyon, the special-order case requires less expensive raw materials, which will cost only €32.5 per case. Management has estimated that the remaining costs, labor time, and machine time will be the same as those for the St. Tropez jewelry case.
The second special order was submitted by the Avignon Co., for 7,500 jewelry cases at €85 per case. These cases would be marketed under the Avignon label and would have to be shipped by July 1, 20X1. The Avignon jewelry case is different from any jewelry case in the St. Tropez line. Its estimated per-unit costs are as follows:
Raw materials ........ €43
Direct labor, .5 hour at €60 .... 30
Overhead, .5 machine hour at €40 . 20
Total costs ........... €93
In addition, St. Tropez will incur €15,000 in additional setup costs and will have to purchase a €20,000 special device to manufacture these cases; this device will be discarded once the special order is completed.
The St. Tropez manufacturing capabilities are limited by the total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year, or 7,500 machine hours per month. The budgeted fixed overhead for 20X1 amounts to €2.16 million, or €24 per hour. All manufacturing overhead costs are applied to production on the basis of machine hours at €40 per hour.
St. Tropez will have the entire second quarter to work on the special orders. Management does not expect any repeat sales to be generated from either special order. Company practice precludes St. Tropez from subcontracting any portion of an order when special orders are not expected to generate repeat sales.
Should St. Tropez accept either special order? Justify your answer and show your calculations.

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  • CreatedNovember 19, 2014
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