Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
d Variable marketing costs are not deducted because they will not be incurred on the special order.
e Fixed marketing costs are irrelevant because they will not change whether or not the special order is accepted. If it must offer the same €50
price to its other customers, Euro-Jouets will lose cash flow of €9
×
130,000 = €1,170,000 per year for 4 years from its existing customers. Note that whatever incremental costs Euro-Jouets incurs on sales to its existing customers is irrelevant. These costs would continue to be incurred whether Euro-Jouets prices the cars at €50 or €59. You can verify that Euro-Jouets generates positive contribution margin at a price of €50 and so should continue to sell to its existing customers. From Appendix B, Table 4, the present value of a stream of €1,170,000 payments for 4 years discounted at 16% is €1,170,000
×
2.798 = €3,273,660. The net relevant benefit of accepting the special order is €3,300,000 − €3,273,660 =
€26,340. Therefore, Euro-Jouets should accept the special order.
2 Let the Euro discount from the current €59 price offered to existing customers be €
X. Then €
X (130,000) (2.798) = 3,300,000
X =
3,300, 000
(130, 000)(2.798)
= €9.0724 At a price of €49.9276 (€59 − €9.0724) per
car to its existing customers, Euro-Jouets would just be indifferent between accepting and rejecting Mille-Fontaines’ special order.
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