Groove Music Company Produces Compact Discs of Background Music for Restaurants

question 67

Essay

Groove Music Company produces compact discs of background music for restaurants and other retail shops.Its disc recording machines are capable of producing 50 discs per hour.The unit-related cost of producing the discs is $2.00.The discs sell for $10.00 each.Mood Music Co.has asked the company to produce 10,000 copies of a disc for $9.00.Groove Music estimates that for this special order the unit-related cost of producing the disc will be $4.00 and that,due to the unique nature of the recording,its machines will only be able to produce 20 discs per hour.Groove Music has a total of 5,000 machine hours of capacity.In addition,to accept the special order,Groove Music will have to lease an additional special-purpose machine that will cost $6,500.
Required:
Assume that existing demand for Groove Music's compact discs is 200,000 units and that the special order has to be either taken in full or rejected.Prepare an analysis that indicates whether or not the special order should be accepted.

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Definitions:

Equity Method

An accounting technique used by a company to record its investment in another company when it has significant influence over that company but does not fully control it.

Investment Account

An account held at a financial institution that is used to buy and hold investment assets, such as stocks, bonds, and mutual funds.

Revenue Recognized

Income that a company has earned and reported in its financial statements for a specific period, following accounting principles.

Trading Investments

Securities that are purchased by a firm for the purpose of realizing a short-term profit.