Should St. Tropez accept either offer? Show calculations.
Here is the case study- It is a French company so everything is in FF
During the 2nd quarter of 2004 management estimates that St. Tropez will be operating at 80% of normal capacity. The company is considering taking special orders. The first is from Lyon Inc., they have offered St. T FF67.5 per jewelry case for 20,000 cases to be shipped by July 1 2005. The cost data for the St. Tropez jewelry case would be similar to the specs. of the Lyon special order
Reg Selling Price Per Unit FF 100
Cost Per Unit:
Raw Materials 35
Direct labor, .5 per hour @ FF 60 30
Overhead, .25 machine hour @ FF 40 10
Total Costs FF 75
According to Lyon's specs. the special order requires less expensive raw materials which will only cost FF 32.5 per case. Mgt. has estimated that the remaining costs, labor time, and machine time will be the same as those for the St. Tropez jewelry case.
The second special order was submitted by Avignon Co. for 7,500 jewelry cases at FF 85 per case. The Avignon case would have to be shipped by July1 2005. The Avignon case is different from the Lyons:
Raw Materials FF 42.5
Direct Labor .5 per hour @ FF 60 30
Overhead .5 machine hour @ FF 40 20
Total Costs FF 92.5
In addition, St. Tropez will incur FF 15,000 in additional setup costs and will have to purchase a FF 25,000 special device to manufacture these cases; this device will be discarded once the special order is complete.
The St. Tropez manufacturing capabilities are limited by the total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year or 7,500 per month. The budgeted fixed overhead for 200X amounts to FF 2.16 mil or FF24 per hour. All manufacturing overhead costs are applied to production on the basis of machine hours at FF 40 per hour.
St. Tropez will have the entire second quarter to work on the special orders. Mgmt. does not expect any repeat sales to be generated from either order. Company practice precludes St. Tropez from subcontracting any portion of an order when special orders are not expected to generate sales.