Mercury Skateboard Company manufactures skateboards. Several weeks ago, the firm received an inquiry from Venus Ltd. Venus wants to market a skateboard similar to one of Mercury's, and has offered to purchase 11 000 units if the order can be completed in three months. The cost data for Mercury's Champion model skateboard are: Direct material

Direct labour (0.125 hours @ $36 per hour)

Total manufacturing overhead: (0.5 machine hours @ $40 per hour)

Total

$16.40

4.50

20.00

$40.90

The following additional information is available:

• The normal selling price of the Champion model is $53. However, Venus has offered Mercury only $31.50 because of the large quantity it is willing to purchase.
• Venus requires a modification of the design that will allow a $4.20 reduction in direct material cost.
• Mercury's production supervisor notes that the company will incur $7400 in additional setup costs and will have to purchase a special device costing $4800 to manufacture these units. The device will be discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production at the rate of $40 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5000 per month).
• Mercury will allocate $3600 of existing fixed administrative costs to the order as 'part of the cost of doing business'.

Questions:

• Assume that present sales will not be affected. Should the order be accepted from a financial point of view. That is, is it profitable? Why? Provide calculations in your assignment to support your answer.

• Assume that Mercury's current production activity consumes 70 per cent of planned machine-hour activity. Can the company accept the order and meet Venus' deadline?

• What options might Mercury consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm?