Case III. Anchor Company manufactures several different styles of jewelry cases. Management estimates that during the third quarter of this year the company will be operating at 80% of normal capacity. Because Anchor wants to increase utilization of plant capacity, the company will consider a special order.
Anchor has received special order inquiries from two companies. The first order is from JCP Inc., which would like to market a jewelry case similar to one of Anchor’s cases. The JCP case would be marketed under JCP’s own label. JCP has offered Anchor P5.75 per cash for 20,000 cases to be shipped by October 1. The cost data for the Anchor jewelry case which is similar to the specifications of the JCP special order are as follows:
Regular selling price per unit P9.00
Cost per unit
Raw materials P2.50
Direct labor (.5 hrs x P6) 3.00
Overhead (.25 machine hrs x P4) 1.00
Total costs P6.50
According to the specification provided by JCP, Inc., the special order case requires less expensive raw materials. Consequently, the raw materials will only cost P2.25 per case., management estimated that the remaining costs, labor time and machine time will be the same for the Anchor case.
The second special order was submitted by the Krage Company for 7,500 jewelry cases at P7.50 per case. These jewelry cases like JCP’s would be marketed under the Krage label and shipped by October 1. However, the Krage jewelry case is different from any jewelry case in the Anchor line. The estimated per unit cost of this case are as follows:
Raw materials P3.25
Direct labor (.5 hrs. x P6) 3.00
Overhead (.5 machine hrs. x P4) 2.00
Total unit costs P8.25
In addition, Anchor will incur P1,500 in additional setup costs and will have to purchase a P2,500 special device to manufacture these cases; this device will be discarded once the special order is completed.
The Anchor manufacturing capabilities are limited to the total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year or 7,500 machine hours per month. The budgeted fixed overhead for the year is P216,000. All manufacturing overhead costs are applied to production on the basis of machine hours at P4 per hour.
Anchor will have the entire third quarter to work on the special orders. Management does not expect any repeat sales to be generated from either special order. Company practice precludes Anchor from subcontracting any portion of an order when special orders are not expected to generate repeat sales.
What is the excess capacity of machine hours available in the third quarter?
What is the variable overhead rate per machine hour?
Would you accept JP’s order?
What is the unit contribution margin per case for Krage’s order?
What is the actual gain (loss) incurred by accepting Krage’s order?