Jazzy Cases manufactures several different styles of jewellery cases. 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 Penny-Wise Department Stores. The manager would like to market a jewellery case similar to one of Jazzy's current models. Penny-Wise wants its own label on the cases and is willing to pay $5.75 per case for 20,000 cases to be shipped by April 1. The cost data for Jazzy's case that is similar to the requested case follow:

Selling price per unit$9.00

Cost per unit:Raw Materials$2.50Direct labour (0.25 hr. $12)3.00Overhead (0.25 machine hr. $4)

1.00

Total cost per unit$

6.50

According to the specifications supplied by Penny-Wise, 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 Jazzy's case.

The second order is from the Star-Mart Company. Its managers want 8,000 cases for $7.50 per case. These jewellery cases, to be marketed under the Star-Mart label, would also need to be shipped by April 1. However, these cases are somewhat different from any cases currently manufactured by Jazzy. Following are the estimated unit costs:

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

Total cost per unit$

8.25

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

Jazzy'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.

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

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1) Explain how machine hour capacity affects the special order decision.

2) What qualitative factors are likely to be important to this decision?

3) Identify and explain risks that affect Jazzy's decision.

4) What might happen to costs if Jazzy's production exceeds 95% of its capacity? Discuss how increased use of capacity from a special order might affect the company's costs. (Hint:Think about whether bottlenecks could arise and how they might affect costs.)

5) Suppose you are the cost accountant for Jazzy.

What is Jazzy'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.

6) Suppose you are the cost accountant for Jazzy.

Write one or two paragraphs explaining how you decided what information to include in your memo.