Special order with no spare capacity Crystal Lattice produces exercise mats for use in fitness centres. Production capacity is 20 000 mats per year. Due to a chain of fitness centres closing, Crystal Lattice now has spare capacity of 2 000 mats per year. An international hotel chain, Resteasy, has recently contacted Crystal Lattice to place a one-off order for 3000 mats. The hotel chain has recently remodelled a number of its hotels to incorporate fitness centres for guests.
• Budgeted costs for 20 000 mats are:
• Variable manufacturing costs $800 000
• Fixed manufacturing costs $900 000.
Mats normally sell for $100 each, and Resteasy has offered to pay $90 per mat. Resteasy has also requested that each mat be embossed with its company logo. An embossing machine costing $20 000 would therefore need to be purchased by Crystal Lattice. The machine could not be used for other products.
Required:
a. From a financial perspective, should Crystal Lattice accept the special order? Show calculations.
b. Would you recommend accepting the order if Crystal Lattice was currently operating at 95% capacity? Show calculations.
c. What other factors should be considered before the order is accepted?