Sportz-a-Lot, Inc., manufactures toys and sporting equipment, including golf kits for preschoolers. A national sporting goods chain recently submitted a special order for 7,600 golf kits. Sportz-a-Lot was not operating at capacity and could use the extra business.

Unfortunately, the order’s offering price of $16.50 per golf kit was below the cost to produce the sets. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce ag olf kit is presented below.

No variable selling or administrative expenses would be associated with the order.
Non-unit-level activity costs are a small percentage of total costs and are therefore not considered.
Required:
1. Assume that the company would accept the order only if it increased total profits.
Should the company accept or reject the order? Provide supporting computations.
2. Suppose that Sportz-a-Lot has negotiated with the potential customer, and has determined that it can substitute cheaper materials, reducing direct materials cost by $1.09 per unit. In addition, the company’s engineers have found a way to reduce direct labor cost by $2.40 per unit. Should the company accept or reject the order?
Provide supporting computations.
3. Consider the personnel manager’s concerns. Discuss the merits of accepting the order even if it decreases total profits.LO1

Transcribed Image Text:

Direct materials Direct labor Variable overhead Fixed overhead Total $ 7.90 5.40 4.75 3.10 $21.15