Special o r der, r e l ev ant c o s ts, capital budgeting.
Euro-Jouets SNC sells neon-coated ‘Feu-Follet’ cars to several local toy stores. It has the capacity to make 250 000 of these units per year, but during the year ending 31 December
2007, it made and sold 130 000 cars to its existing customers. It makes these cars by dip- ping its highly unsuccessful ‘Garou-Garou’ model plastic toy cars into a vat of neon paint. It originally purchased 780 000 of the Garou-Garous but has been unable to sell them as Garou-Garous. These plastic cars originally cost €20 per unit, and 650 000 of them remain in stock.
Euro-Jouets’ accountant has prepared the following cost sheet per Feu-Follet car:
Selling price per car € 59
Manufacturing costs per car
Plastic cars €20
Neon paint 6
Boxes 3 29
Direct manufacturing labour
Depreciation of vat
Allocated plant manager’s salary 5
Manufacturing costs per car 52
Gross margin per car 7
Marketing costs per car ( € 2 of which is variable) 6
Operating margin per car € 1
On 31 December 2007, the Mille-Fontaines chain asked Euro-Jouets to provide 100 000 Feu- Follet cars at a special price of €50 per car. Euro-Jouets will not need to incur any marketing cost for the Mille-Fontaines sale.
Euro-Jouets expected to sell the Feu-Follet cars to its existing customers for the next four years at the current level of demand of 130 000 units per year and none thereafter. At the end of four years, Euro-Jouets will dispose of the VAT and whatever cars remain at zero net disposal value. If Euro-Jouets accepts the Mille-Fontaines order, it is certain that its other customers will refuse to pay the current price of €59 and will demand a discount. Euro- Jouets estimates a required rate of return of 16%.
1 Should Euro-Jouets accept the special order if it must also offer the same price of €50 to its existing customers for the next four years?
2 Suppose Euro-Jouets is uncertain about the discount the existing customers would demand. Determine the price that Euro-Jouets would have to offer its existing customers for the next four years to be indifferent between accepting and rejecting Mille-Fontaines’ special order.