Euro-Jouets SNC sells neon-coated 'Feu-Follet' cars to several local toy stores. It has the capacity to make
Question:
Euro-Jouets' accountant has prepared the following cost sheet per Feu-Follet car:
On 31 December 2007, the Mille-Fontaines chain asked Euro-Jouets to provide 100 000 Feu-Follet cars at a special price of ¬50 per car. Euro-Jouets will not need to incur any marketing cost for the Mille-Fontaines sale.
Euro-Jouets expected to sell the Feu-Follet cars to its existing customers for the next four years at the current level of demand of 130 000 units per year and none thereafter. At the end of four years, Euro-Jouets will dispose of the VAT and whatever cars remain at zero net disposal value. If Euro-Jouets accepts the Mille-Fontaines order, it is certain that its other customers will refuse to pay the current price of ¬59 and will demand a discount. Euro-Jouets estimates a required rate of return of 16%.
Required
1. Should Euro-Jouets accept the special order if it must also offer the same price of ¬50 to its existing customers for the next four years?
2. Suppose Euro-Jouets is uncertain about the discount the existing customers would demand. Determine the price that Euro-Jouets would have to offer its existing customers for the next four years to be indifferent between accepting and rejecting Mille-Fontaines' special order.
Step by Step Answer:
Management and Cost Accounting
ISBN: 978-1405888202
4th edition
Authors: Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, George Foster