Special order, relevant costs, capital budgeting. (A. Spero, adapted) Toys, Inc., sells neoncoated Nightglow cars to several local toy stores. It has the capacity to make 250,000 of these units per year, but during the year ending December 31, 2007, it made and sold 130,000 cars to its existing customers. It makes these cars by dipping its highly unsuccessful Gander model plastic toy cars into a vat of neon paint. It originally purchased 780,000 of the Ganders but has been unable to sell them as Ganders. These plastic cars originally cost $24 per unit, and 650,000 ofthem remain in inventory.

Toys’ accountant has prepared the following cost sheet per Nightglow car:

Selling price per car Manufacturing costs per car:

Direct materials:

Plastic cars Neon paint Boxes Direct manufacturing labour Vat amortization Allocated plant manager’s salary Manufacturing costs per car Gross margin per car Marketing costs per car ($2.40 ofwhich is variable)

Operating margin per car

$24.00 7.20 3.60 34.80 9.60 12.00 6.00

$70.80 62.40 8.40 7.20

$ 1.20 On December 31, 2007, the Tiny Tot chain asked Toys, Inc., to provide 100,000 Nightglow cars at a special price of $60 per car. Toys, Inc., will not need to incur any market¬

ing cost for the Tiny Tot sale.

Toys, Inc., expected to sell the Nightglow 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, Toys, Inc., will dispose of the vat and whatever cars remain at zero net dis¬

posal price. IfToys accepts the Tiny Tot order, it is certain that its other customers will refuse to pay the current price of $70.80 and will demand a discount. Toys estimates a required rate CHAPTER 21 ofreturn of 16%.

Required 1. Should Toys accept the special order ifit must also offer the same price of $60 to its existing customers for the next four years?
2. Suppose Toys is uncertain about the discount the existing customers would demand.
Determine the price that Toys, Inc., would have to offer its existing customers for the next four years to be indifferent between accepting and rejecting Tiny Tot’s special order.