Cost Data for Financial Reporting and Special Order Decisions

Friendly Greeting Card Company produces a full range of greetings cards sold through pharmacies and department stores. Each card is designed by independent artists. A production master is then prepared for each design. The production master has an indefinite life. Product designs for popular cards are deemed to be valuable assets. If a card sells well, many batches of the design will be manufactured over a period of years. Hence, Friendly Greeting maintains an inventory of production masters so that card may be periodically reissued. Cards are produced in batches that may vary by increments of 1,000 units. An average batch consists of 10,000 cards. Producing a batch requires placing the production master on the printing press, setting the press for the appropriate paper size, and making other adjustments for colors and so forth. Following are facility-, product-, and unit-level cost information:

Product design and production master per new card $ 2,000.00

Batch setup (typically per 10,000 cards). 200.00

Materials per 1,000 cards.. 100.00

Conversion per 1,000 cards.. 80.00

Shipping

Per batch... 25.00

Per card. 0.02

Selling and administrative

Companywide.. 200,000.00

Per product design marketed 500.00

Previous year

Products designs and masters prepared for new cards.. 90

Product designs marketed 120

Batches manufactured.. 500

Cards manufactured and solid. 5,000,000

Required

a. Describe how you would determine the cost of goods sold and the value of any ending inventory for financial reporting purposes. (No computations are required.)

b. You have just received an inquiry from Walgreens stores to develop and manufacture 20 special designs for sale exclusively in Walgreens stores. The cards would be sold for $1.50 each, and Walgreens would pay Friendly Greeting $0.35 per card. The initial order is for 20,000 cards of each design. If the cards sell well, Walgreens plans to place additional orders for these and other designs. Because of the preestablished sales relationship, no marketing costs would be associated with the cards sold to Walgreens. How would you evaluate the desirability of the the Walgreens proposal?

c. Explain any differences between the costs considered in your answer to requirements (a) and the costs considered in your answers to requirements (b).