Special Order Analysis for High Performance Ltd (HPL)
Should High Performance Ltd (HPL) accept the special order from the national sports charity for manufacturing cycling jerseys?
Analysis of Special Order for HPL
As a financial consultant for High Performance Ltd (HPL), let's analyze the special order from the national sports charity to manufacture 200,000 cycling jerseys for its annual charity cycling event. We'll consider both the quantitative and qualitative aspects to make a recommendation.
Quantitative Analysis
To determine if the special order should be accepted, we need to compare the incremental revenue from the order with the incremental costs incurred. Let's calculate the relevant figures:
Incremental Revenue:The charity suggests each participant pays $30 for a jersey, which is well below HPL's retail price of $75. Therefore, the incremental revenue from the order is:
Incremental Revenue = Number of jerseys * Price per jersey
Incremental Revenue = 200,000 * $30 = $6,000,000
Incremental Costs:a) Purchase of a screen print machine: $75,000
b) Set-up costs: $25,000
c) Additional direct labor hours per jersey: 0.25 labor hours * 200,000 jerseys
d) Additional machine hours per jersey: 0.5 machine hours * 200,000 jerseys
Let's assume we have the cost per labor hour and the cost per machine hour to calculate the incremental labor and machine costs.
Qualitative Analysis
In addition to the financial aspects, we need to consider the qualitative factors. These may include the reputation enhancement of associating with a well-known national charity, potential marketing and exposure benefits, goodwill in supporting a women's health initiative, and the long-term relationship with the charity for possible future collaborations.
Recommendation
Based on the quantitative analysis, calculate the incremental costs and compare them to the incremental revenue. If the incremental revenue is significantly higher than the incremental costs, accepting the special order would be financially beneficial for HPL.
However, considering the qualitative factors is equally important. If the association with the national charity can lead to increased brand visibility, positive customer perception, and potential future partnerships, it could be a valuable strategic move for HPL.
Ultimately, a comprehensive evaluation of both the quantitative and qualitative aspects will help the Muscles brothers make an informed decision. They should weigh the potential financial gains against the non-financial benefits and their long-term business objectives before making a final decision on accepting the special order.