East Coast Digital (EGO) - Digital Television Systems - Accounting and Finance Assignment Help

Assignment Task:

East Coast Digital (EGO) produces high-quality audio and video equipment. One of the company's most popular products is a high-definition personal video recorder (PVR) for use with digital television systems. Demand has increased rapidly for the PVR over the past three years, given the appeal to customers of being able to easily record programs while they watch live television, watch recorded programs while they record a different program, and save dozens of programs for future viewing on the unit's large internal hard drive. A complex production process is utilized for the PVR involving both laser and imaging equipment. ECD has a monthly production capacity of 4,000 hours on its laser machine and 1,000 hours on its image machine. However, given the recent increase in demand for the PVR, both machines are currently operating at 90% of capacity every month, based on existing orders from customers. Direct labour costs are $15 and $20 per hour to operate, respectively, the laser and image machines. 
Operating profit On December 1, Dave Nance, vice-president of Sales and Marketing at ECD, received a special-order request from a prospective customer, Jay Limited, which has offered to buy 250 without disrupting our ability to fill existing orders. Then we could determine how many units we would have to forgo selling to existing customers to make up the 250 unit order. That would then be our opportunity cost in terms of the number of physical units involved. Make sense? Nance: I think so. So, to get the dollar amount of the opportunity cost of accepting the 250-unit order from Jay Limited we'd then simply multiply the number of units we'd have to forgo selling to existing customers by $40. Correct? o Davis: I'm not so sure about the $40. I think we somehow need to factor in the incremental profit we typically earn by selling each PVR to existing customers to really get to the true opportunity cost. o Nance: Now I'm getting really getting confused. Can you work through the numbers and get back to me? Davis: try. Nance: Thanks. And by the way, Jay Limited is calling in an hour and wants our answer. 

Required: 

1. Is Davis's general approach to calculating the opportunity cost in terms of the physical units involved correct? Explain.

2. Assuming productive capacity cannot be increased for either machine in December, how many PVRs would ECD have to forgo selling to existing customers to fill the special order from Jay Limited?  

3. Calculate the opportunity cost of accepting the special order. 

4. Calculate the net effect on profits of accepting the special order.

5. Now assume that ECD is operating at 75% of capacity in December. What is the minimum price ECD should be willing to accept on the special order?

6. What are some qualitative issues that should be considered when accepting special orders such as that proposed by Jay Limited?  

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