Special-Order Decision Rianne Company produces a light fixture with the followin

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? Yes , the quantitative analysis is $ in favor of accepting 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. Both 1 and 2.

Explanation / Answer

1)

There is a net profit of $100,000 so the special order should be accepted.

Fixed cost is irrelevant of decision making And there is no sales commission involved.

2) Qualitative Factors are hard to quantify. The idle capacity issue is being faced by the company.

1. By accepting special order company will produce to near its capacity. So the company can avoid laying off its laborer. So it will increase company's reputation.

2.Company's normal price is much higher than special order price. It might affect the regular customer. But the customer is from a geographic region outside the area normally served by the company, so there are low chances of adverse effect.

If special order accepted: Particulars Amount $ Amount $ Revenue ($7*100,000) (a) $        700,000 Cost of goods sold Direct Material ($2*100,000) $        200,000 Direct Labor($1*100,000) $        100,000 Variable Overhead ($3*100,000) $        300,000 Total cost (b) $        600,000 Total net profit (a-b) $        100,000

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