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Management Accounting (Winter Games Case Study)

Winter Games manufactures a competitive line of skis and sells its skis to retailers at a price of $225 per pair. Based on an annual volume of 5,000 pairs, the cost per pair is $185:

Direct labor ($75 per pair) $375,000
Direct material ($60 per pair $300,000
Overhead
Fixed* $100,000
Variable ($0.40 per direct labor dollar $150,000 $250,000

Total costs $925,000
Annual Volume (pairs) / 5,000

Cost per pair $ 185

*composed of depreciation, property taxes, charitable contributions, insurance, and so on.

Sports Palace, a discount sporting goods store, currently purchases 500 pairs of skis from Winter Games. Sports Palace has asked to purchase 1,000 pairs of skis under a private brand label, at a price of $200 per pair. The skis would be identical to those normally sold for $225.

Winter Games believes that if it accepts the order, Sports Palace will cancel its usual order to 500 pairs. These sales cannot be recouped elsewhere. If this special order is accepted, the direct labor hours for the additional 500 skis would have to be compensated at overtime rates (at 1.5 times the base rate). Analysis shows that variable overhead varies with total direct labor dollars at the rate of $0.40 per direct labor dollar.

Should Winter Games accept the special order from Sports Palace?

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answer

per unit total
Direct labor ($75 per pair) $75 $375,000
Direct material ($60 per pair $60 $300,000
Overhead
Fixed* $20 ...

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This solution provides a complete computation of the given accounting problem in Excel.

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