Reference no: EM133349475

Case Study - Accept new order - Relevant Costs

High Performance Ltd (HPL) sells high quality workout clothing across Canada and the United States. HPL is a private company owned by three brothers, John, Jim and Joe Muscles.

The company has been in business for 10 years and been very profitable, especially in the past five years. All sales are done on-line. The clothing is of premium quality and is priced at a premium amount. The top-selling products include hooded sweatshirts, and workout pants, tops and shorts. A typical customer is female between the ages of 25 and 45.

All clothing is priced at total cost plus 60%. The HPL manufacturing facility currently has capacity to use about 5 million machine hours annually and currently the facility is operating at about 60% capacity or about 3 million machine hours.

HPL has been approached by a well-known national sports charity that supports women's health. The charity has asked HPL to manufacture 200,000 cycling jerseys for its annual charity cycling event. The charity has suggested that each participant pay $30 for a jersey, which is well below the retail price of $75 normally charged by HPL (See Table A). In order to manufacture the jerseys HPL would need to incur the following costs:

Purchase of a screen print machine at $75,000.
$25,000 in set-up costs.
An additional 0.25 labour hours per Jersey over and above HPL's standard direct labour hours (see Table A).
An additional 0.5 machine hours per Jersey over and above HPL's standard machine hours (see Table A).

The brothers are familiar with this charity and the good work they do and want to assist however, they are not sure, from a financial perspective, whether they should accept this special order or not.

Required:

As a special financial consultant to HPL make a brief report, supported by a quantitative and qualitative analysis, with a recommendation as to if the order should be accepted or not.

Table A - Current cost structure for a standard Jersey