Basket Wallets produces several different styles of wallets. Management estimates that during the first quarter of this year, the company will operate at about 80% of normal capacity. Two special orders have been received, and management is making a decision about whether to accept either or both orders.

The first order is from Wally's. The manager would like to market a wallet similar to one of Basket's current models. Wally's wants its own label on the cases and is willing to pay $5.75 per wallet for 20,000 wallets to be shipped by April 1. The cost data for Basket's wallet that is similar to the requested case follow:

Selling price per unit $9.00 Cost per unit Raw Materials $2.50 Direct labour (0.25 hr. @ $12) $3.00 Overhead (0.25 machine hr. @$4) $1.00 $6.50

According to the specifications supplied by Wally's, the special order case requires less expensive raw materials. Therefore, the raw materials for the special order will cost $2.25 per case. Management believes that the rest of the costs, labour time, and machine time will remain the same as for Basket's wallet.

The second order is from the Green Origin Company. Its managers want 8,000 wallets for $7.50 per wallet. These wallets, to be marketed under the Green Origin label, would also need to be shipped by April 1. However, these wallets are somewhat different from any wallets currently manufactured by Basket. Following are the estimated unit costs:

Cost per unit Raw Materials $3.25 Direct labour (0.25 hr. @ $12) $3.00 Overhead (0.5 machine hr. @$4) $2.00 $8.25

In addition to these per-unit costs, Basket would incur $1,500 in setup costs and would need to purchase $2,500 in special equipment to manufacture these wallets. Currently, Basket would have no other use for the equipment once this order was filled.

Basket's capacity constraint is total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year, or 7,500 hours per month. Fixed manufacturing overhead costs are allocated to production on the basis of machine hours at $4.00 per hour and are budgeted at $360,000 per year.

Basket can work on the special orders throughout the entire first quarter, in addition to performing its normal production. Basket's managers do not expect any repeat sales to be generated from either special order.

INFORMATION ANALYSIS

The following questions will help you analyze the information for this problem. Please include the answers to these questions in your appendix. A) What is the excess capacity of machine hours available in the first quarter? Explain how machine hour capacity affects the special order decision. B) Ignore the Green Origin order. What is the minimum acceptable price for the Wally's order? C) Ignore the Wally order. What is the contribution margin per case for the Green Origin order? What would be the total expected profit/(loss) incurred by accepting this order? D) Using only quantitative information, decide which special orders Basket should accept. E) What qualitative factors are likely to be important to this decision? F) Identify and explain risks that affect Basket's decision.