Now suppose Diamond is currently producing and selling 54 comma 000 bats. If Diamond accepts Home Run's offer it will have to sell 10 comma 000 fewer bats to its regular customers. (a) On financial considerations alone, should Diamond accept this one-time special order? Show your calculations. (b) On financial considerations alone, at what price would Diamond be indifferent between accepting the special order and continuing to sell to its regular customers at $ 37 per bat? (c) What other factors should Diamond consider in deciding whether to accept the one-time special order?

a)  

Statement of Incremental Profit

If Special Order is Accepted - 10,000 Bats

Incremental Income  

Sales Revenue - 10,000 Nos X $21    210,000.00  

Savings of Variable Selling Expense - 10,000 Nos X $2      20,000.00     230,000.00

Incremental Cost:  

Direct Materials - 10,000 Nos X $14    140,000.00  

Direct Labor - 10,000 Nos X $4      40,000.00  

Variable MOH - 10,000 Nos X $2      20,000.00  

Loss of Contribution on Normal sales - 10,000 Nos X $15    150,000.00     350,000.00

Incremental Profit (Loss)  (120,000.00)

Contribution Margin per Bat - Normal sales = $37 - ($14 + $4 + $2 + $2)  

Contribution Margin per Bat - Normal sales = $15  

No, Diamond Corporation should not accept the Order.  

b)  

Special order Price per Unit = Incremental Cost + Contribution Lost per Unit

Incremental Cost = $14 + $4 + $2 = $20  

Contribution Lost per Unit = $37 - ($14 + $4 + $2 + $2)  

Contribution Lost per Unit = $15 per unit  

Special order Price per Unit = $20 + $15  

Special order Price per Unit = $35 per Unit  

c)  

The other factors to be considered before accepting the order are:  

1. Effect of on relationship between the existing customers.  

2. Whether the order is a one time or can be repeated in future.