Saguaro Company is a leading producer of disposable chop sticks and other utensils. One of the company's major product lines is high-quality chop sticks which are sold to some of the country's best Asian restaurants, including large national chains. Each set of chop sticks is sold at a price of $0.38 per pair. To maintain its high-quality image, Saguaro uses a thick premium wood, a special varnish, and individually wraps each pair of chop sticks. Based on annual production of 5,000,000 sets of chop sticks, Saguaro's cost for producing a pair of chop sticks is as follows:
| Wood | $0.05 |
| Varnish | 0.02 |
| Direct labor | 0.05 |
| Variable overhead | 0.08 |
| Fixed overhead | 0.10 |
| Total cost per pair | $0.30 |
Sharon Steele is opening a new Asian restaurant in her hometown. She recently contacted one of Saguaro's top salespeople, Simon Green, about purchasing utensils for her new restaurant. Simon described Saguaro's products, emphasizing the high-quality materials and processes the company uses. Sharon is looking for ways to lower her operating costs, so after hearing Simon describe Saguaro's products, she told him that all she wants are 20,000 unwrapped chop sticks. Sharon told Simon she is willing to pay $0.09 per chop stick ($0.18 per pair).
Required
| a. | Based on Sharon's offer of $0.09 per chop stick, should Saguaro accept Sharon's |
order? Saguaro currently has excess production capacity and can easily accommodate Sharon's order in the production schedule.
| b. | Since Sharon wants simple chop sticks, Simon is exploring using a lighter-weight |
wood for her order. He has found a suitable product that will cost $.02 per chop stick. If Saguaro uses this lighter-weight wood for Sharon's order, should the company accept Sharon's order at a price of $0.09 per chop stick? Saguaro currently has excess production capacity and can easily accommodate Sharon's order in the production schedule.
| c. | After visiting with Sharon, Simon received a fax from one of Spain's top Asian |
restaurants. The restaurant's normal utensil supplier suffered some earthquake damage and is unable to ship the restaurant's order of 20,000 pairs of chop sticks this month. The restaurant's owner is asking if Saguaro can fill a one-time rush order of 20,000 pairs of chop sticks. The restaurant is willing to pay an 8% price premium to expedite the order. If Saguaro accepts the order, it will incur $2,250 in export taxes and shipping. Should Saguaro accept the Spanish restaurant's offer?
| d. | What qualitative issues should Saguaro consider as it evaluates both Sharon's order |
and the Spanish restaurant's order? Are these issues different for the two orders?
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