Ford Motor Case

Ford Motors. produces light systems for cars and sells them for 100€ each. Full capacity is 20.000 per month, but is currently producing 18.000 systems per month for its regular customers. The company reports the following monthly results: 

  | Per unit | Total |

Revenue | 100,00€ | 1.800.000,00€ |

Direct materialsDirect Manufacturing LaborVariable Manufacturing OHFixed Manufacturing OH | 25,00€10,00€22,00€3,00€ | 450.000,00€180.000,00€396.000,00€54.000,00€ |

Variable Selling Expenses | 19,00€ | 342.400,00€ |

Fixed Selling Expenses | 2,00€ | 36.000,00€ |

Operating Income | 19,00€ | 342.000,00€ |

Ford Motors manager receives a call regarding a one-time special order: Lucky Garages, s.a. needs 2.000 systems and will pay 65€ per system. Ford Motorswill incur no selling costs for the special order.

Requirements:

1. Should Ford Motors accept this one-time special order? What would monthly operating income be if Ford Motors did accept Lucky Garages order?

a. Yes, they should accept the order.

b. They will have no selling costs, so we calculate the per unit cost less the selling costs (81 – 19 – 2 = 60) Revenue would be increased by 130.000 (65*2000), and costs would be increased by 120,000. So new operating income would be the difference – 10.000.

2. Lucky Garages manager calls again to say they really need 2.500 systems at the same 65€ price. It will be an all-or-nothing deal. What should they do?

They should decline, because they be over capacity by 500.

They should still not accept, because the 65 per unit in revenue they are making is less than the 81 in expenses.

3. Up to what volume could Ford Motors better supply Lucky Garages at a selling price of 65€?

They could supply up to 2.000 because they are currently producing 18.000 systems, and have a capacity of 20.000. They can only produce up to capacity. So, if they eliminated all of their regular customers, they could produce 20.000 systems for the client.