Compact discs producing capacity of Groovy Music Company = 50 discs per hour Unit-related cost of producing the discs = $3. 00 Selling price of discs = $12. 00 Profit per disc = $12. 00 – $3. 00 = $9. 00 (Selling price – Cost price) In case of order from Food Mood Music Company Order size = 10000 Ask price = $9. 00 Unit-related cost of producing the discs for this special order from Food Mood Music Company = $5. 00 (due to the unique nature of the recording) New capacity of Groovy Music Company = 20 discs per hour Profit Margin per disc in case of Food Mood Music order = .
00 – $5. 00 = $4. 00 (Selling price – Cost price)
Cost of additional special-purpose machine required to complete the special order = $6,000. Constraints for Groovy Music Company 1. Total machine hours capacity of Groovy Music Company = 5,000 2. Special order has to be either taken in full or rejected Problem 1 Demand for Groovy Music’s compact discs = 200,000 units As we can see profit per unit in case of normal production is greater than profit per unit in case of Food mood music order Time required for making 200000 (assuming normal order) = 200000/50 = 4000 hours
Time left = 5000 – 4000 = 1000 hours Amount of special produced in 1000 hours = Number of hours * number of discs produced per hour = 1000*20 = 20000 discs So we can take the order as required units for the special order = 10000 units Profit if special order taken = Profit/unit*No.
of units – Cost of additional special purpose machine = 4*$10000 – $6000 = $34000 So special order should be accepted Problem 2 Current sales of compact discs to the regular customers = 230,000 units Time required to produce 230,000 units = 230,000/50 = 4600 hours
Additional hours left = 5000 – 4600 = 400 hours No of special units which can be produced in 400 hours = 400*20 = 8000 units 8000 units is less than the required order size which is 10000 units So, Special order has to be rejected due to time constraint.
Problem 3 Current sales of compact discs to the regular customers = 230,000 units As we have seen in Problem 2 that due to time constraint we cant take the order but if we have to take the order but profit earned in both the deals should be same as we can not afford loosing earnings.
Profit earned from selling 10000 units to normal customer = Profit per unit * Number of units sold = $9 * 10000 = $90000 Suppose new price charged for the special discs produced = $X/unit Profit earned from selling 10000 units in special order = (Profit per unit * Number of units sold) – Cost of additional special-purpose machine = (x-5)*10000 – $6000 For break even analysis Profit earned in both the cases should be same (X-5) * 10000 – $6000 = $90000 Calculating X = $14. 6 So to achieve break even analysis Groovy Music Company should charge $14. 6/unit if Food mood music’s order has to be taken.
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