Question 6

Kien Sneakers is trying to decide whether to accept a special order for 30,000 pairs of mens sneakers at a special price of 35. They have sold 120,000 pairs of mens sneakers in the current year and their costs per pair have been as indicated in the table below. Assume total production capacity is 150,000 units Their selling price in the current year was 60 per pair.

	Costs per unit	Total cost
Direct materials	12
Direct labour	15
Variable manufacturing overhead	3
Fixed manufacturing overhead	10	1,200,000
Variable selling and admin expenses	2
Fixed selling and admin expenses	2	240,000

Required:

a)Should the company accept or refuse the special order? Please show all the calculations that make you reach your answer.

b) Now assume that Kien could use its spare capacity to launch another product, which would provide them with a profit contribution of 120,000. Would their decision about the special-order change and why?

c) Last year, Kien priced their mens sneakers at 50 and sold 200,000 units. Did this price give them a higher profit than the normal sales price (60)?

d)Estimate the price elasticity of demand for Kiens mens sneakers using the normal sales price (60) and the price used last year (50).

e)Using the price elasticity of demand, calculate the profit maximizing price for Kiens mens sneakers.