Waihi Woodworks: Special Order and Scarce Labour
Waihi Woodworks makes wooden toys. It has a monthly capacity of 2,000 labour hours. It currently makes and sells 1,600 units of Toy A. Each Toy A uses 1.2 labour hours and sells for $45; variable costs are $27 per unit. Fixed costs are $18,000 per month. A customer offers a special order for 300 units of Toy A at $34 per unit. The order would require an additional $1,500 for a special logo stencil, which has no other use. Alternatively, Waihi could use the same labour hours to make Toy B. Each Toy B uses 2 labour hours and sells for $70; variable costs are $40 per unit. There is enough demand for up to 500 units of Toy B. The owner wants to know whether to accept the special order, or switch some capacity to Toy B, or do both.
1. Calculate the contribution per labour hour for Toy A (normal), the special order, and Toy B. Use this to recommend the best use of the available labour hours.
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Current hours used: 1,600 × 1.2 = 1,920 hours; spare capacity = 2,000 - 1,920 = 80 hours.
- Normal Toy A: contribution = $45 - $27 = $18 per unit; per labour hour = $18 / 1.2 = $15.00.
- Special order: contribution = $34 - $27 = $7 per unit; per labour hour = $7 / 1.2 = $5.83. The order also needs 300 × 1.2 = 360 hours and a $1,500 stencil. Net contribution = 300 × $7 - $1,500 = $600; per order hour = $600 / 360 = $1.67.
- Toy B: contribution = $70 - $40 = $30 per unit; per labour hour = $30 / 2 = $15.00.
Recommendation: reject the special order. It uses 360 hours, but only 80 are spare, so 280 hours must be taken from normal Toy A. Lost contribution = 280 × $15 = $4,200; special order net contribution is only $600, so profit falls by $3,600. Use the 80 spare hours to make 40 units of Toy B (contribution $1,200), because Toy B earns the same $15 per hour as normal Toy A.
2. Explain two qualitative factors Waihi Woodworks should consider before accepting the special order.
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First, the effect on the customer relationship: accepting a low-price order may encourage the customer to expect similar prices and may upset regular customers who pay $45. Second, future orders and brand reputation: a special logo order may lead to repeat business, but it may also tie up capacity and delay regular orders. Staff morale and overtime are also relevant.
3. If the special order price was $40 instead of $34, would your recommendation change? Show calculations.
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At $40, contribution per unit = $40 - $27 = $13; total contribution = 300 × $13 = $3,900; less stencil $1,500 = $2,400. The order still uses 360 hours, so 280 hours are displaced from normal Toy A. Opportunity cost = 280 × $15 = $4,200. Net effect = $2,400 - $4,200 = -$1,800. The recommendation does not change: reject the order, because it still reduces profit. The price would need to be higher, or spare capacity would need to be available, for acceptance to be worthwhile.