Barney Toy Company manufactures large and small stuffed animals. It has a long-term contract with a large chain of discount stores to sell 3000 large and 6000 small stuffed animals each month. The following cost information is available for large and small stuffed animals:
Item Large Small
Price per unit $32 $21
Variable costs per units:
Direct material $12 $10
Direct labor 6 3
Support 2 1
Fixed mfg. costs per unit 3 3
Fixed S&A cost per unit 4 6
Total unit costs $27 $23
Total monthly demand
(inclusive of long-term contract) 15,000 25,000
Production occurs in batches of 100 large or 200 small stuffed animals. Each batch takes a total of 100 labor hours to manufacture. The monthly capacity of 30,000 labor hours cannot be increased for at least a year.
Required
a.Determine which size is more profitable to produce. How many units should Barney produce of each size?
Because of an unexpected high demand for stuffed dinosaurs, the discount store chain has requested an additional order of 5000 large stuffed dinosaurs. It is willing to pay $37 for this special order.
b.What is the opportunity cost for this special order? Should the order be accepted? Show calculations and explain.
c.Now assume that the company can increase the capacity by making its employees work overtime. What is the maximum overtime premium that can be paid to the workers if the special order is accepted.