Question
Perilous Parachutes manufactures sky diving equipment. The Compact Canopy is their best-selling product, with a production capacity of 60,000 per year and currently selling 52,000
Perilous Parachutes manufactures sky diving equipment. The Compact Canopy is their best-selling product, with a production capacity of 60,000 per year and currently selling 52,000 units per year. Chaos Tours wish to make a special order for 6,000 Compact Canopies, and have offered $200 per unit. The normal selling price for the Compact Canopy is $300.
Perilous Parachutes estimates their unit costs for a single Compact Canopy as follows:
Direct materials | $80 |
Direct labour | $40 |
Variable overheads | $30 |
Fixed overheads | $70 |
Total costs | $220 |
Additional information:
Chaos Tours requires a modification to the Regulator design that will cost an additional $5 per unit. Perilous Parachutes had already spent $1,000 on design for the Chaos Tours modification.
Set-up costs for the special order (additional to current fixed overheads) will be $20,000.
Required:
a) From a purely financial point of view, is the special order worthwhile for Perilous Parachutes?
Show calculations to support your answer.
b) Would your answer to (a) change if the order was increased to 10,000 units? Justify your answer.
c) Are there any other factors that Perilous Parachutes should consider when deciding whether to accept or reject the special order?
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