Question

Special-Order Decision

Rianne Company produces a light fixture with the following unit cost:

Direct materials	$2
Direct labor	1
Variable overhead	3
Fixed overhead	2
Unit cost	$8

The production capacity is 300,000 units per year. Because of a depressed housing market, the company expects to produce only 180,000 fixtures for the coming year. The company also has fixed selling costs totaling $500,000 per year and variable selling costs of $1 per unit sold. The fixtures normally sell for $12 each.

At the beginning of the year, a customer from a geographic region outside the area normally served by the company offered to buy 100,000 fixtures for $7 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any variable selling costs.

Required:

1. Conceptual Connection: Based on a quantitative (numerical) analysis, should the company accept the order?
, the quantitative analysis is $ in favor of the special order.

2. CONCEPTUAL CONNECTION What qualitative factors might impact the decision? Assume that no other orders are expected beyond the regular business and the special order.

Answer 1

	1
			Relavant Cost for the Special Order:
			Direct Material	2.00
			Direct Labor	1.00
			Variable OH	3.00
			Total Relevant Cost	6.00
		Note:	Fixed OH cost is sunk cost for the order! Since Idle capacity is available and no additional fixed cost is being incured
			Special Order Price	7.00
			Total Relevant Cost	6.00
			Net Benefit	1.00
			Order Quantity	100000
			Net Benefit	100000
			Company should accept the Order
	2	Qualititive Factor:
		Accepting the order may impact regular market
		Roundtriping of the Product should be taken into account