Question

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz’s total production cost is \(0.58 per pack, as follows:

Variable costs:

Direct materials \)0.11

Direct labor 0.09

Variable overhead 0.08

Fixed overhead 0.30

Total cost \(0.58

Collector-Cardz has enough excess capacity to handle the special order.

Requirements

1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.

2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?

Short answer

Answer

The expected increase in the operating income of the company would be$5,600.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Differential Analysis

Differential analysis refers to the technique used by the business entities to analyze whether the business should accept one-time special offers or reject them. Such an analysis is the tabular presentation of the data related to cost and revenues.

Preparation of differential analysis

Particulars	Amounts ($)
Expected revenues (56,000*0.38)	21,280
Less: Expenses
Direct materials (56,000*0.11)	(6,160)
Direct labor (56,000*0.09)	(5,040)
Variable overheads (56,000*0.08)	(4,480)
Expected increase in operating income	$5,600

Decision

According to the given scenario, Collector-Cardz should not accept the special order under any circumstances because an additional expense of $5,700 is an irrecoverable cost. Hence, the order should not be accepted because it may lead tooperating losses.