Question - Hamline Wheels manufactures wheels for bicycles. Hamline is known for quality wheels and reliable service. Hamline's operating capacity is 45,000 units. Results for the most recent year are as follows:
Per Unit
Sales price $50.00
Direct materials 14.00
Direct labor 16.00
Variable manufacturing overhead 5.50
Fixed manufacturing overhead 2.50
Marketing -variable 5.00
Marketing -fixed 2.00
Units produced & sold 44,000
Hamline has received a request for a special order of 2,500 for $115,000 from Betty's Bike Shop. Betty's Shop is a start-up small business trying to break into the local bicycle sales market. Betty is not a current customer of Hamline. Hamline's production costs for the wheels would be the same however Hamline would incur additional set-up costs of $10,000 to complete Betty's order. No marketing costs would be associated with the special order. If Betty's offer is accepted she requires the full order of 2,500 wheels.
Required: Complete each of the following questions. Clearly show supporting calculations for each answer.
1. Does Hamline have the capacity to accept Betty's special order?
2. If Hamline accepts Betty's special order, what is Hamline's cost of lost sales from current customers?
3. Using a relevant cost analysis should Hamline accept Betty's special order?
4. If Hamline was operating at full capacity what is the minimum price Hamline should accept from Betty's for the special order?
5. If Hamline had excess capacity what is the minimum price Hamline should accept from Betty's for the special order?