Walleye pro fishing worlds offer is priced at 100 per

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Unformatted text preview: otherwise compete with sales of Rippin’ Rogues. Walleye Pro Fishing World’s offer is priced at $1.00 per unit. Lunker Lures is obligated to pay its representatives half of the normal rep fee for such private label transactions. On the surface it appears that Lunker Lures should not accept this order. After all, the offer is priced below the noted cost of production. However, so long as Walleye Wigglers do not compete with sales of Rippin’ Rogues, and Lunker Lures has plenty capacity to produce lures without increasing fixed costs, profit will be enhanced by $200,000 ($0.20 X 1,000,000) by accepting the order. The following analysis focuses on the relevant items in reaching this conclusion: Selling price per unit Direct material per unit Direct labor per unit Variable factory overhead per unit ($0.50 X 30%) Manufacturing margin Variable selling costs (50% of normal) * Contribution margin $ 0.20 0.40 0.15 $ 1.00 0.75 $ 0.25 0.05 $ 0.20 Note: Aggregate fixed costs will be the same whether the special order is accepted or not. The per unit allocation of fixed costs is not relevant. Download free ebooks at 15 Business Decision Logic Analytics for Managerial Decision Making 2.7 Capacity Constraints and the Impact on Special Order Pricing A potential error in special order pricing is acceptance of special orders offering the highest contribution margin per dollar of sales, while ignoring capacity constraints. Notice that the special order for Walleye Wigglers offered a 20% contribution margin ($0.20/$1.00). Suppose Bass Pro Fishing World also placed a special order for a Bass Buzzer lure, and that special order afforded a 30% margin on a $1.00 per unit selling price. At first glance, one would assume that the Bass Pro Fishing World would represent the better choice. But, what if you were also informed that remaining plant capacity would allow production of either 1,000,000 Walleye Wigglers or 600,000 Bass Buzzers? Now, the total contribution margin on the Wiggler is $200,000 (1,000,000 units X $0.20) while the total contrib...
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