Problem: Catherine Chancellor Manufacturing, Inc. is presently operating at 50% of practical capacity producing about 50,000 units annually of a patented electronic component. Chancellor recently received an offer from a company in Yokohama, Japan, to purchase 30,000 components at $6.00 per unit, FOB Chancellor’s plant. Chancelor has not previously sold components in Japan. Budgeted production costs for 50,000 and 80,000 units of output follow:
Units 50,000 80,000
Costs:
Direct Material $75,000 $120,000
Direct Labour 75,000 120,000
Manf. Overhead 200,000 260,000
Total costs $350,000 $500,000
Cost per unit $7.00 $6.25
The sales manager, Jack Abbott, thinks the order should be accepted, even if the results in a loss of $1.00 per unit, because he feels that the sale may build up future markets. The production manager does not wish to have order accepted primarily because the order would show a loss of $0.25 per unit when computer on the new average unit cost. The treasure, Jill Abbott, has made a quick computation indication that accepting the order will actually increase gross margin.
Required to answer:
Question 1: Explain what apparently caused the drop in cost from $7.00 per unit to $6.25 per unit when budgeted production increased from 50,000 to 80,000 units.
Question 2:
i) Explain whether (either or both) the production manager and the treasure are reasoning correctly
ii) Explain why the conclusions of the production manger and treasure differ
Question 3: Explain why each of the following may affect the decision to accept or reject the special order:
i) The likelihood of repeat special sales/and or all sales to be made at $6.00 per unit.
ii) Whether the sales are made to customers operating in two seprate, isolated markets or whether the sales are made to customers competing in the same markets.