Reference no: EM13333612

Decision making and relevant information

On 4 February 2013, Southern Star Ltd received a phone call from a potential customer in India who wants to sell the boards in India, starting 1 July 2013. The customer offers Southern Star Ltd 10% more per skateboard than what the current selling price is and wants to buy exactly the same number of boards per month (starting 1 July 2013) as what Southern Star Ltd is currently budgeting for. Thus, Southern Star Ltd will have to manufacture twice as many boards per month as the budgeted sales from 1 July 2013. The skateboards should be delivered a month following the date of sale. Thus, if Southern Star Ltd records the sale in July 2013, then the skateboards should be delivered on the first day of September 2013. Southern Star can start the manufacturing of the skateboards for this order any time from 1 March 2013. The customer believes they will be able to double their order in 2014 and again in 2015.

Southern Star Ltd bought its own building to use for the manufacturing of the skateboards 10 years ago. However, the building can only accommodate Southern Star's current machinery, that has a capacity to manufacture 8 000 skateboards per month (4 000 of each type of skateboard). Other than the space constraint of the building, Southern Star's management is not aware of any other constraints and/or issues that could hinder then from meeting this customer's order. The CEO contemplates following many other Australian companies, moving their manufacturing businesses to India as one option for expanding the business. The labour costs and rent of property in India are about half of what they currently are in Australia.

Required:

Advise the CEO of Southern Star Ltd whether to accept or reject the order. Discuss the following issues that Southern Star Ltd will have to consider in deciding whether to accept or reject the order.

1. Relevant costs.
2. Other financial issues and costs.
3. Other non-financial issues.

Please note that 3 marks are allocated for demonstrating appropriate communication skills in your essay. To receive these 3 marks your essay must be well written, have logical arguments and a coherent discussion, be free of grammatical and spelling mistakes, and use of the correct formatting and reference styles.

You will also only receive full marks if you justify your answers and decisions for the three issues above with figures, and if you provide sufficient calculations to support these figures. It is recommended that you base your calculations and discussions in Part B on the figures you calculated in Part A, but you are not expected to redo any budgets in answering Part B.