Question

Bradford Stenback Sunglasses sell for $ 125 per pair. Suppose the company incurs the ­following average costs per pair:
Direct materials.............................................................................................................. $ 38
Direct labor.................................................................................................................... 10
Variable manufacturing overhead.................................................................................. 9
Variable marketing expenses......................................................................................... 3
Fixed manufacturing overhead...................................................................................... 20*
Total costs....................................................................................................................... $ 80
*$ 2,100,000 total fixed manufacturing overhead / 105,000 pairs of sunglasses

Bradford Stenback has enough idle capacity to accept a one- time- only special order from Snodgrass Opticians for 19,000 pairs of sunglasses at $ 68 per pair. Bradford Stenback will not incur any variable marketing expenses for the order.

Requirements
1. How would accepting the order affect Bradford Stenback’s operating income? In addition to the special order’s effect on profits, what other (longer term, qualitative) factors should the company’s managers consider in deciding whether to accept the order?
2. Bradford Stenback’s marketing manager argues against accepting the special order because the offer price of $ 68 is less than the cost to make the sunglasses. The marketing manager asks you, as one of Bradford Stenback’s staff accountants, to explain whether this analysis is correct.



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  • CreatedAugust 27, 2014
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