Question

Katsumoto Inc. (Katsumoto) manufactures and sells collectible swords. Katsumoto currently operates at 80% of its 15,000-unit capacity based on direct labour hours. Katsumoto’s current customers are extremely loyal sword enthusiasts who come to Katsumoto for its large selection and high quality. Per-unit cost information for the swords currently produced is as follows:

Direct materials	$35
Direct labour (0.5 hours)	13
Manufacturing overhead	25
Packaging and selling expenses *	14

* Packing and selling expenses include variable selling expenses of $8 per sword.

Variable overhead is applied to each product at a rate of $12 per direct labour hour. Swords currently sell for $120 each.

Katsumoto has been approached by a third party, Algren Corp., with a request to produce 5,000 swords that Algren Corp. will purchase for $125 per sword. These swords will require an adjustment to the manufacturing process that will cost $10,500 and will NOT have any future benefit to Katsumoto. Furthermore, direct labour will increase to 0.75 hours per sword. All other costs would remain the same for this order.

Required:

1. Determine whether Katsumoto should accept the special order from Algren Corp.

Answer 1