Question

Hoover Cole Sunglasses sell for about $ 153 per pair. Suppose the company incurs the ­following average costs per pair:
Direct materials.............................................................................................................. $ 50
Direct labor.................................................................................................................... 14
Variable manufacturing overhead.................................................................................. 7
Variable marketing expenses......................................................................................... 3
Fixed manufacturing overhead...................................................................................... 25*
Total costs....................................................................................................................... $ 99
2,100,000 total fixed manufacturing overhead
84,000 pairs of sunglasses
Hoover Cole has enough idle capacity to accept a one- time- only special order from Colorado Glasses for 19,000 pairs of sunglasses at $ 91 per pair. Hoover Cole will not ­incur any variable marketing expenses for the order.

Requirements
1. How would accepting the order affect Hoover Cole’s operating income? In addition to the special order’s effect on profits, what other (longer- term qualitative) factors should Hoover Cole’s managers consider in deciding whether to accept the order?
2. Hoover Cole’s marketing manager, Jim Revo, argues against accepting the special order because the offer price of $ 91 is less than Hoover Cole’s $ 99 cost to make the sunglasses. Revo asks you, as one of Hoover Cole’s staff accountants, to explain whether his analysis is correct.



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  • CreatedAugust 27, 2014
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