Q25-10E
Question
Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz’s total production cost is \(0.58 per pack, as follows:
Variable costs:
Direct materials \)0.11
Direct labor 0.09
Variable overhead 0.08
Fixed overhead 0.30
Total cost \(0.58
Collector-Cardz has enough excess capacity to handle the special order.
Requirements
1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.
2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?
Step-by-Step Solution
VerifiedAnswer
The expected increase in the operating income of the company would be $5,600.
Differential analysis refers to the technique used by the business entities to analyze whether the business should accept one-time special offers or reject them. Such an analysis is the tabular presentation of the data related to cost and revenues.
Particulars | Amounts ($) |
Expected revenues (56,000*0.38) | 21,280 |
Less: Expenses |
|
Direct materials (56,000*0.11) | (6,160) |
Direct labor (56,000*0.09) | (5,040) |
Variable overheads (56,000*0.08) | (4,480) |
Expected increase in operating income | $5,600 |
According to the given scenario, Collector-Cardz should not accept the special order under any circumstances because an additional expense of $5,700 is an irrecoverable cost. Hence, the order should not be accepted because it may lead to operating losses.