The present paper discusses whether Burns Sporting Goods Company should accept an order from an overseas company for 200,000 dozen golf balls for a price of $22 for a dozen. The full cost of producing one dozen golf balls is $25, where $18 is a variable cost, and $7 is a fixed cost. However, the company has just enough capacity to fulfill the order.
In accounting terms, the present case should be treated as a special order. In general, companies should accept orders when benefits exceed costs (Warren et al., 2016). Benefits, however, are not always immediate, as potential benefits are also crucial. Sometimes, firms may accept orders if further orders may follow, if completing the order gives access to new markets, or if the order allows keeping workers on their jobs in difficult economic situations when normal orders are unavailable (Warren et al., 2016). In the present case, the benefits exceed costs, as the plan can produce golf balls using excess capacity. In other words, Burns Sporting Goods Company will need to cover only the variable cost of production ($18 per dozen), which is below the offered price of $22 per dozen. Additionally, the order gives access to a new market. Thus, the company should accept the order.
However, before accepting the order, Burns Sporting Goods Company should make several considerations before accepting the order. First, the special order will make the plant work at near full capacity, which may negatively affect the quality of products (Warren et al., 2016). Second, other customers may want to lower the price of their orders if they find out that Burns Sporting Goods Company offers lower prices on special orders. Finally, the company should make sure that the overseas partner will not want to have even lower prices on the following orders.
References
Warren, C., Reeve, J., & Duchac, J. (2016). Financial and managerial accounting (13th ed.). Cengage Learning.