Question

The Stiefvater Company manufactures a variety of industrial valves and pipe fittings that are sold to customers in the region. Currently the company is operating at about 70 percent of capacity and is earning a satisfactory profit. Glascow Industries, Ltd., of Scotland has approached Stiefvater with an offer to buy 120,000 units of pressure valves. Glascow normally produces its own valves, but a fire in one of its plants has caused a temporary shortage. Glascow needs the 120,000 valves over the next four months to meet commitments to its regular customers. It is prepared to pay $ 19 for each valve. Stiefvater’s product cost for the pressure value is as follows:
Direct materials ........................................................ $ 5.00
Direct labor ............................................................... 6.00
Unit-related overhead .............................................. 6.00
Facility-sustaining overhead .................................... 7.00
Total cost ................................................................... $ 24.00
Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5 percent (excluded for this order) and freight expense of $ 1.00 per unit. Stiefvater normally sells the pressure valves at a markup on unit-related manufacturing cost of 75 percent. Production management believes that it can handle the Glascow order without disrupting its scheduled production. The order would, however, require additional batch-related overhead of $ 12,000 per month. If management accepts this order, 30,000 pressure valves will be manufactured and shipped to Glascow each month for the next four months.
Required
A. What are the relevant variables for this decision?
B. Should Stiefvater accepts this order?
C. What factors other than those identified in part (A) should Stiefvater consider before making this decision?


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  • CreatedMarch 25, 2015
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