Titan Drill Co. (TD) makes and sells titanium-steel drills that are used to cut hardened metals in
Question:
TD is considering a large order from Sunset Company for drills whose titanium content must be much greater than that of TD's regular drills. Sunset needs 10,000 high-titanium (ht) drills but insists on taking delivery of all 10,000 within the upcoming quarter. Sunset will not pay over $50 per unit and will turn to TD's competitor if TD cannot deliver all 10,000 within the specified time. The Sunset order represents TD's first opportunity to produce and sell ht drills.
With one exception, TD's existing technology is capable of producing the ht drills. The one exception is that the abrasive wheels normally used for the cut-off operation are not adequate for cutting ht material. If the Sunset order is accepted, the cut-off operation will require the use of a computer-controlled, diamond-tipped saw for two months of the coming quarter. TD does not have such a saw but can rent one for a fee of $5,500 per month, which also covers the saw owner's delivery, installation, and removal of the saw. Both the diamond-tipped saw and the usual abrasive-wheel operation are highly automated and require no direct labor. The variable overhead costs (electricity, lubricants, cleaning rags, etc.) incurred in the cut-off operation will be three times as high for each ht drill as for a regular drill.
Direct materials will cost $2 more for each ht drill than for a regular drill. Direct labor will cost the same for each ht drill as for a regular drill. If the Sunset order is accepted, it will involve no sales commissions. To begin the Sunset order, TD will have to hire a metallurgist as a temporary consultant for a fee of $4,000.
TD's output cannot exceed 60,000 regular drills per month because of limited grinding-machine capacity. Each ht drill will require three times as much grinding-machine time as one regular drill requires.
Without the Sunset order, TD's output for the upcoming quarter will consist of only regular drills, and its budgeted operating income for the quarter will be as summarized below. The Sunset order is the only business available to TD for the quarter, beyond what is reflected here:
TD's manufacturing costs include fixed costs of $1,400,000 per month. TD's selling and administrative costs include fixed costs of $900,000 per month. On each regular drill, TD pays a sales commission calculated as 5% of the sales price. TD's variable manufacturing overhead depends only on the amount of grinding-machine time used. In making one regular drill, TD incurs variable manufacturing overhead costs of $2.50.
Required:
(1) Calculate the lowest price for which the special order could be accepted without reducing the budgeted operating income for the coming quarter.
(2) Before deciding whether to accept the special order, what non-quantitative factors should the company consider?
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