Should St. Tropez accept either special order? Justify your answer and show your calculations. (Hint: Distinguish between variable and fixed overhead.)
Andrea Martin, Reeta Odish, Iwona Jedrzejczaki Accounting 2270 Chapter 5 Group 2 page 217-218 Lyron Special Order Regular Selling Price per Unit Sales Less Manufacturing cost Total Raw Material Less Required Special Order Case Materials Direct labor Manufacturing Overhead Variable Fixed 0.50 at (euro) 24 Total Manufacturing Overhead 0.50 at (euro) 40 Total Manufacturing Cost ( total cost per unit) Gross Margin 100.00 Avignon Special Orders 20,000 $ 2,000,000 85.00 7,500 $ 637,500 M 67.50 32.50 35.00 30.00 700,000 600,000 43.00 30.00 322,500 225,000 10.00 200,000 20.00 150,000 87.00 13.00 $ 1,500,000 $ 500,000 93.00 (8.00) $ 697,500 -$ 60,000 12.00 P.S. Please click on the Tab (highlighted in red) below that says Instruction from the textbook for more information. Question 1. Should St. Tropez accept either special order? Justify your answer and show your calculations ( Hint: Distinguish between Variable and Fix Overhead) On B 9 the Total Raw Material for Lyron is 67.5 and the special order requires less expensive raw material which is 67.5 minus 32.5 equal 35 Chapter 5 - 62 Use of Capacity St. Tropez S.A. manufactures several different styles of jewelry cases in southern France. Management estimates that during the second quarter of 20X1 the company will be operating at 80% of normal capacity. Because the company desires a higher utilization of plant capacity, it will consider a special order. St. Tropez has received special-order inquiries from two companies. The first is from Lyon, which would like to market a jewelry case similar to one of St. Tropez's cases. The Lyon jewelry case would be marketed under Lyon's own label. Lyon has offered St. Tropez E67.5 per jewelry case for 20,000 cases to be shipped by July 1 , 20X1 . The cost data for the St. Tropez jewelry case, which would be similar to the specifications of the Lyon special order, are as follows: Regular Selling Price per Unit Cost per Unit: Raw Materials Direct labors 0.50 per hour at 60 euros Over head, 25 machine hour at 40 euros Total cost per unit 100 35 30 10 75 According to the specifications provided by Lyon, the special-order case requires less expensive raw materials, which will cost only E32.5 per case. Management has estimated that the remaining costs, labor time, and machine time will be the same as those for the St. Tropez jewelry case. The second special order was submitted by the Avignon Co., for 7,500 jewelry cases at E85 per case. These cases would be marketed under the Avignon label and would have to be shipped by July 1, 20X1. The Avignon jewelry case is different from any jewelry case in the St. Tropez line. Its estimated per-unit costs are as follows: Raw Materials Direct Labor, 0.50 hour at 60 euros Overhead, 0.50 machine hour at 40 euros Total Costs 43 30 20 93 In addition, St. Tropez will incur E15,000 in additional setup costs and will have to purchase a E20,000 special device to manufacture these cases; this device will be discarded once the special order is completed. The St. Tropez manufacturing capabilities are limited by the total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year, or 7,500 machine hours per month. The budgeted fixed overhead for 20X1 amounts to E2.16 million, or E24 per hour. All manufacturing overhead costs are applied to production on the basis of machine hours at E40 per hour. St. Tropez will have the entire second quarter to work on the special orders. Management does not expect any repeat sales to be generated from either special order. Company practice precludes St. Tropez from subcontracting any portion of an order when special orders are not expected to generate repeat sales. Should St. Tropez accept either special order? Justify your answer and show your calculations. (Hint: Distinguish between variable and fixed overhead.) A ccounting 2270 Cha pter 5 Group 2 pa ge 217-218 Without Special Order (St. Tropez) Volume in Units S a les Less Ma nufa cturing cost Ma teria ls Direct labor (0.50 hour at 60 euro) T ota l Ma nufa cturing Cost Wit h Special O rder Lyron 100 20000 2,000,000.00 68 20000 1,350,000 35 30 65 700,000.00 6 00,000.00 1,300,000.00 35 30 65 700,000 6 00,000 1,300,000 Wit h Special O rder Avignon 85 43 30 7,500 6 37,500 322,500 225,000 54 7,500 Overhea d Variable cost: In addition, 15,000 euro plus another 20,000 euro Va ria ble 16 4 8 0,000.00 Fixed Overhead allocation rate is 90,0000 machine hours per year divided by 2,160,000 million (euro) equals 24 euro per hour. 24 6 120,000.00 40 10 200,000.00 10 75 25 1,500,000.00 500,000.00 75 8 Fixed Total Manufacturing Overhead Cost (0.25 machine hour at 40 euro) T ota l cost per Unit Gross Ma rgin Total Manufacturing Overhead Cost(0.50 machine 200,000 hour at 40 euro) 1,500,000 150,000 Question 1. S hould S t. T ropez a ccept either specia l order? Justify your a nswer a nd show your ca lcula tions ( Hint: Distinguish between Va ria ble a nd Fix Overhea d) St. Trope z should not acce pt e ithe r spe cial orde r. The company ne e ds to manufacture the orde r of 20,000 je we lry case s from Lyon Inc. without subcontracting and the re isn't e nough capacity. 5 15 20 35,000 115,000 150,000 6 9 7,500 ( 6 0,000) Chapter 5 - 62 Use of Capacity St. Tropez S.A. manufactures several different styles of jewelry cases in southern France. Management estimates that during the second quarter of 20X1 the company will be operating at 80% of normal capacity. Because the company desires a higher utilization of plant capacity, it will consider a special order. St. Tropez has received special-order inquiries from two companies. The first is from Lyon, which would like to market a jewelry case similar to one of St. Tropez's cases. The Lyon jewelry case would be marketed under Lyon's own label. Lyon has offered St. Tropez E67.5 per jewelry case for 20,000 cases to be shipped by July 1 , 20X1 . The cost data for the St. Tropez jewelry case, which would be similar to the specifications of the Lyon special order, are as follows: Regular Selling Price per Unit Cost per Unit: Raw Materials Direct labors 0.50 per hour at 60 euros Over head, 25 machine hour at 40 euros Total cost per unit 100 35 30 10 75 According to the specifications provided by Lyon, the special-order case requires less expensive raw materials, which will cost only E32.5 per case. Management has estimated that the remaining costs, labor time, and machine time will be the same as those for the St. Tropez jewelry case. The second special order was submitted by the Avignon Co., for 7,500 jewelry cases at E85 per case. These cases would be marketed under the Avignon label and would have to be shipped by July 1, 20X1. The Avignon jewelry case is different from any jewelry case in the St. Tropez line. Its estimated per-unit costs are as follows: Raw Materials Direct Labor, 0.50 hour at 60 euros Overhead, 0.50 machine hour at 40 euros Total Costs 43 30 20 93 In addition, St. Tropez will incur E15,000 in additional setup costs and will have to purchase a E20,000 special device to manufacture these cases; this device will be discarded once the special order is completed. The St. Tropez manufacturing capabilities are limited by the total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year, or 7,500 machine hours per month. The budgeted fixed overhead for 20X1 amounts to E2.16 million, or E24 per hour. All manufacturing overhead costs are applied to production on the basis of machine hours at E40 per hour. St. Tropez will have the entire second quarter to work on the special orders. Management does not expect any repeat sales to be generated from either special order. Company practice precludes St. Tropez from subcontracting any portion of an order when special orders are not expected to generate repeat sales. Should St. Tropez accept either special order? Justify your answer and show your calculations. (Hint: Distinguish between variable and fixed overhead.)
