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\mathrm{.}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\mathrm{.}00$

Cost per unit

Raw Materials $$2\mathrm{.}50$

Direct labour $(0\mathrm{.}25$ hr$.$ @ $$12)$ $$3\mathrm{.}00$

Overhead $(0\mathrm{.}25$ machine hr$.$ @$$4)$ $$1\mathrm{.}00$

$$6\mathrm{.}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\mathrm{.}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\mathrm{.}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\mathrm{.}25$

Direct labour $(0\mathrm{.}25$ hr$.$ @ $$12)$ $$3\mathrm{.}00$

Overhead $(0\mathrm{.}5$ machine hr$.$ @$$4)$ $$2\mathrm{.}00$

$$8\mathrm{.}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\mathrm{.}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.

WRITTEN ASSIGMENT

$1.$ Write a memo to Basket$$s management, recommending whether

the company should accept each of the special orders. Attach to

the memo a schedule that shows your computations. As

appropriate, refer to the schedule in the memo.

$2.$ Write one or two paragraphs explaining how you decided what

information to include in your memo.