Cardinal Corp. manufactures high quality wooden birdhouses and sells mainly through local and regional garden and landscaping retailers. While attending a trade show, Cardinals vice president was introduced to the president of a catalogue retailer that specializes in finer garden and home productsSide Door Products. Side Doors president was impressed with Cardinals product, but believes her customers would prefer an upgraded version of the birdhouse using cedar rather than pine. Side Doors president would like to make a trial purchase of 10,000 units to see how her customers respond. Further, she must purchase the houses for a maximum price of $90 to maintain her price point to her customers. Cardinals vice president has asked the controller and operations people to develop a standard cost estimate for this deluxe cedar birdhouse. The vice president was provided with the following standard costs for the basic and deluxe products: Standard Product Costs Standard Cost -Basic Quantity Cost Per Total Cost Direct materials (pine) 6.00 Board feet $ 6.00 $ 36.00 Direct labor 1.50 DL hours $ 18.00 $ 27.00 Variable overhead 1.50 DL hours $ 1.50 $ 2.25 Fixed overhead 1.50 DL hours $ 3.00 $ 4.50 $ 69.75 Standard Cost - Deluxe Quantity Cost Per Total Cost Direct materials (cedar) 6.50 Board feet $ 8.10 $ 52.65 Direct labor 1.80 DL hours $ 18.00 $ 32.40 Variable overhead 1.80 DL hours $ 1.50 $ 2.70 Fixed overhead 1.80 DL hours $ 3.00 $ 5.40 $ 93.15 Other information: Since this was an ad-hoc request that needed a quick turnaround, the controller used the established $3.00 per direct labor hour fixed overhead rate to build the deluxe product cost Production personnel expect that they would incur a one-time cost of approximately $20,000 to buy and build cutting jigs and different saw blades that will reduce splintering of the cedar boards Cardinal has the labor and other productive capacity to meet this special order without sacrificing any core business Upon hearing of this opportunity, the president was excited, but indicated that there was no way that this work could be profitable at an $90 selling price ...it seems pretty simple to meour manufacturing costs for these deluxe houses is over $90 and based on our budget we incur between $9 and $10 per unit in general and administrative costsso we would lose money for every unit we sell themand thats before we consider the additional manufacturing costs of $20,000. As much as I would love to get my foot in the door with Side Door, I just have to reject this offer. Required: Do you agree with the Cardinals decision to reject this business? Support your conclusion with appropriate analysis and commentary. What additional information would you like to know before you made such a decision? Would your analysis and recommendation change if the special order was for 7,500 units?

Answer rating: 100% (QA)

Analysis of Cardinal Corps Decision I disagree with Cardinals initial decision to reject the business opportunity with Side Door Products Heres why Pr... View the full answer