11.2: Special Order Decisions
Learning Outcomes
- Identify the data needed to support a special order decision
A call just came in to Hupana for a special order shoe. A basketball team would like Hupana to make 50 pair of their shoes, with the awesome soles, but a high top version in fuschia! They have never made high tops before, nor do they have the material in fuschia. The team is willing to pay $150 a pair for these custom shoes. What information does Hupana need to decide if taking this special order is a good idea or not?
When you first look at this interesting order, it looks good right? Hupana can make a quick $7,500 for 50 pair of shoes! That is $50 per pair more than they currently charge, and it shouldn’t take long to make 50 pair.
Ben, the purchasing manager, starts to make some calls about the fuschia material for the shoes. He finds out that this particular color is hard to come by. The raw material is going to cost $3 per unit, and it will take 7 units per pair, since they are high tops.
Cost for a regular pair of shoes $2 per unit × 5 units= $10 per pair
Cost for the fuchsia high tops $3.50 per unit × 7 units= $24.50 per pair.
Ben also finds out that to cut the new pattern for the high tops will require a die for their material cutter. The cost of this special die is $1200. Oh, Mary let us know that the production workers would need to work overtime to make the special order, so the direct labor cost would be $30 an hour, since they would be paid time and a half for the hours, and they are going to take an hour per pair to make, as opposed to the half hour for the regular shoes.
So let’s take a look at where we are at with our Special Order-Fuschia High Tops
| Revenue (50 pair @ $150 each) | $7,500 |
|---|---|
| Expenses | |
| Material-fuschia-(50 x 7 unites x $3.5 per unit) | $1,225 |
| Direct labor (50 x .8 x $30) | $1,200 |
| Variable overhead (30 hours x $3 per hour) | $150 |
| Total variable expenses | $2,575 |
| Fixed Expense | |
| Dye for material cutter | $1,200 |
| Total expenses for special order | $3,775 |
| Incremental net operating income | $3,725 |
So even with all the extra costs, the special order fuschia high tops will add $3725 to the net income! So it is a go for the high tops!
What else might happen because of this special order? It is like really great advertising for Hupana! Their shoes will be on the basketball court for all the world to see!
Kaatz Company sells one product and received a call about a special order. Take a look at their decision process:
Practice Questions