Speedy Sports manufactures footballs and has the capacity to produce 80,000 balls per year. Budgeted information for
Question:
Speedy Sports manufactures footballs and has the capacity to produce 80,000 balls per year. Budgeted information for the current year is as follows:
Expected sales (80,000 units) $400,000
Direct Materials $ 100,000
Direct Labour $ 80,000
Manufacturing overhead $ 120,000
They have been approached by a major football team, PSB United, with a request for a special order of 10,000 balls. Because of the large order being placed, PSB are only willing to pay $4 per ball for the special order.
PSB United requires the balls to be stamped with their team logo which will require the purchase of a special machine for $10,000. After Speedy Sports completes the special order they will have no further use for the machine.
In addition, the logo will require a special coloured dye which will add $0.25 to the materials cost per ball.
The budgeted manufacturing overhead is based, in part, on budgeted annual fixed manufacturing overhead of $100,000.
In the middle of the year, prior to PSB requesting the special order, management had estimated that annual sales would amount to only 70,000 units.
Required:
1. Jill, the trainee accountant at Speedy Sports, was asked to do a preliminary analysis and recommends rejecting the special order because it would result in a financial loss. Do you agree with Jill?
2. Explain how Jill may have arrived at her conclusion that the special order would result in a financial loss. Also explain the error in Jill’s approach that you have just outlined.
Managerial Accounting A Focus on Ethical Decision Making
ISBN: 978-0324663853
5th edition
Authors: Steve Jackson, Roby Sawyers, Greg Jenkins