Exercise 1: Making Special Pricing Decisions ✓ Solved

Exercise 1namenameexercise 1making Special Pricing Decisions

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Hungry-Cardz with a special order. The Hall of Fame wishes to purchase 55,000 baseball card packs for a special promotional campaign and offers $0.33 per pack, a total of $18,150. Hungry-Cardz’s total production cost is $0.53 per pack, which includes direct materials ($0.13), direct labor ($0.04), variable overhead ($0.11), and fixed overhead ($0.25). The company has enough excess capacity to handle the order.

In addition, the Hall of Fame now wants special hologram baseball cards, requiring Hungry-Cardz to spend $5,000 on development, which will be useless after the order is completed. The price per pack remains $0.33.

The task is to analyze whether Hungry-Cardz should accept this special order under both scenarios—without and with the hologram development cost—by performing differential analyses that evaluate impacts on revenue, costs, and operating income.

Sample Paper For Above instruction

Introduction

Pricing decisions are crucial for manufacturing companies, often requiring detailed analysis to determine whether special orders should be accepted. Such decisions involve assessing incremental revenues and costs associated with the order, considering capacity constraints, additional development costs, and potential effects on overall profitability. This paper evaluates two scenarios faced by Hungry-Cardz regarding a special order from the Baseball Hall of Fame, applying differential analysis techniques to guide managerial decisions.

Scenario 1: Assessing the Impact of the Special Order Without Development Costs

Hungry-Cardz received an offer to sell 55,000 baseball card packs at $0.33 per pack, totaling $18,150. The variable costs per pack are $0.28, comprising direct materials ($0.13), direct labor ($0.04), and variable overhead ($0.11). Fixed overhead costs are $0.25 per pack and are considered sunk in this analysis since capacity is sufficient. The total fixed overhead of the company is not impacted by this order, as there is excess capacity.

Differential Analysis: Revenue and Variable Costs

  • Expected increase in revenue: $0.33 × 55,000 = $18,150
  • Expected increase in variable manufacturing costs: $0.28 × 55,000 = $15,400

Impact on Operating Income

The differential operating income is the contribution margin from the order: Revenue minus variable costs.

Contribution margin: $18,150 - $15,400 = $2,750

Since fixed costs are unaffected, accepting this order would increase operating income by $2,750, indicating a profitable opportunity.

Scenario 2: Including Development Cost for the Hologram Cards

Suppose the Hall of Fame now requires special hologram cards. The development cost is $5,000, which is a fixed, one-time expense that will become useless once the order is completed. The price per pack remains at $0.33, with variable costs unchanged at $0.28 per pack.

Additional Fixed and Variable Costs

  • Development cost (fixed): $5,000
  • Variable costs per pack: $0.28

Differential Revenue and Costs Analysis

  • Expected increase in revenue: $18,150 (unchanged)
  • Expected increase in variable manufacturing costs: $15,400 (unchanged)
  • Additional fixed development costs: $5,000

Impact on Operating Income

The new contribution margin remains $2,750, but after deducting the development expense, the net impact decreases by $5,000. Therefore, the net change in operating income is:

Operating income change = $2,750 - $5,000 = -$2,250

This analysis indicates that accepting the hologram cards order would decrease overall operating income by $2,250, making it an unprofitable decision under these circumstances.

Conclusion

In the first scenario, accepting the special order at $0.33 per pack is financially advantageous, adding $2,750 to operating income. However, when including the development costs for hologram cards, the order would reduce net income by $2,250. Managers should thus accept the order in the first case but decline it when hologram development expenses are involved, assuming no change in the per-pack selling price.

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