Question
Gloucester Ltd. manufactures specialized valves. For the first six months of 2002 the company reported the following operating results. Amount Per unit Sales $4,000,000 $50.00
Gloucester Ltd. manufactures specialized valves. For the first six months of 2002 the company reported the following operating results.
| Amount | Per unit |
Sales | $4,000,000 | $50.00 |
Cost of goods sold | 3,200,000 | 40.00 |
Selling and administrative expenses | 320,000 | 4.00 |
Net income | $480,000 | $6.00 |
Fixed costs included in cost of goods sold in the period were $800,000; fixed costs included in selling and administrative expenses were $60,000.
Gloucester recently received a special order from an overseas industrial customer, Brewery Supply Industries (BIS), for 9,000 brewery valves at a price of $36.50 each. Accepting the order would increase variable selling and administrative expenses by $0.75 per unit because of additional shipping costs, but it would not increase fixed costs or any other unit variable costs.
Assume that Gloucester currently has just sufficient excess capacity to fill this one-time order which will take 6 months to fill.
Ignore income taxes.
Required
- Moira Keating, VP Sales, wants to know how profitable this special order would be. Prepare a financial analysis of this order for Ms Keating.
- Ms Keating has some additional questions regarding the BIS order:
- What is the break-even selling price per unit?
- What selling price would be required to produce a contribution margin of $6.00 per unit?
C. Identify and briefly justify what you would consider to be the two most important factors that are not directly financial and that management should consider in making its decision?
D. Ms Keating, VP Sales, is still unsure about the wisdom of accepting the BIS order. She has asked you to prepare a full report dealing with all the relevant issues and make a recommendation to her as to whether Gloucester Ltd. Should accept this order. Justify your conclusion, citing all relevant factors, quantitative and qualitative, including those that have been raised in your answers above.
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