Question

Special Order

Lorraine manufactures a single product with the following full unit costs for 3,000 units:

Direct materials	$80
Direct labor	40
Manufacturing overhead (40% variable)	120
Selling expenses	40
Administrative expenses (10% variable)	20
Total per unit	$300

A company recently approached Lorraine with a special order to purchase 500 units for $300. Lorraine currently sells the models to dealers for $550. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order.

Required:

Should Lorraine accept the special order if its goal is to maximize short-run profits? Determine the impact on profit of accepting the order.

Determine the minimum price Lorraine would want, to increase profits by $80,000 on the special order of 500 units.

When making a special order decision, what non-quantitative aspects of the decision should Lorraine consider?

Answer 1