Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached
Hobby-Cardz with a special order. The Hall of Fame wishes to purchase 57,000
baseball card packs for a special promotional campaign and offers $0.41 per pack, a
total of $23,370. Hobby-Cardz’s total production cost is $0.61 per pack, as follows:
Direct materials $ 0.13
Direct labor 0.06
Variable overhead 0.12
Fixed overhead 0.30
Total cost $ 0.61
Hobby-Cardz has enough excess capacity to handle the special order.
1. Prepare a differential analysis to determine whether Hobby-Cardz should accept
the special sales order.
2. Now assume that the Hall of Fame wants special hologram baseball cards.
Hobby-Cardz will spend $5,900 to develop this hologram, which will be useless
after the special order is completed. Should Hobby-Cardz accept the special
order under these circumstances, assuming no change in the special pricing of
$0.41 per pack?
E25-13 Making dropping a product decisions
Top managers of Movie Street are alarmed by their operating losses. They are
considering dropping the DVD product line. Company accountants have
prepared the following analysis to help make this decision:
Total fixed costs will not change if the company stops selling DVDs.
1. Prepare a differential analysis to show whether Movie Street should drop the
DVD product line.
2. Will dropping DVDs add $41,000 to operating income? Explain.
Fiber Systems manufactures an optical switch that it uses in its final product. The
switch has the following manufacturing costs per unit:
Direct Material $ 9.00
Direct Labor 1.50
Variable Overhead 5.00
Fixed Overhead 9.00
Manufacturing Product Cost $ 24.50
Another company has offered to sell Fiber Systems the switch for $18.50 per unit.
If Fiber Systems buys the switch from the outside supplier, the manufacturing
facilities that will be idled cannot be used for any other purpose, yet none of the
fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Fiber Systems should
make or buy the switch.
Lifemaster produces two types of exercise treadmills: regular and deluxe. The
exercise craze is such that Lifemaster could use all its available machine hours to
produce either model. The two models are processed through the same production
departments. Data for both models is as follows:
Sale Price $ 1,020 $ 560
Direct Material 300 90
Direct Labor 88 188
Variable Manufacturing Overhead 264 88
Fixed Manufacturing Overhead* 138 46
Variable Operating Expenses 111 65
Total Costs 901 477
Operating Income $ 119 $ 83
*allocated on the basis of machine hours
1. What is the constraint?
2. Which model should Lifemaster produce? (Hint: Use the allocation of fixed
manufacturing overhead to determine the proportion of machine hours used by
3. If Lifemaster should produce both models, compute the mix that will maximize
This problem continues the Davis Consulting, Inc. situation from Problem P24-37
of Chapter 24. Davis Consulting provides consulting services at an average price
of $175 per hour and incurs variable costs of $100 per hour. Assume average fixed
costs are $5,250 a month.
Davis has developed new software that will revolutionize billing for companies.
Davis has already invested $200,000 in the software. It can market the software as
is at $30,000 per client and expects to sell to eight clients. Davis can develop the
software further, adding integration to Microsoft products at an additional development
cost of $120,000. The additional development will allow Davis to sell the
software for $38,000 each, but to 20 clients.
Should Davis sell the software as is or develop it further?