Pagilla, Inc., manufactures croquet sets. A national sporting goods chain recently submitted a special order for 4,000 croquet sets. Pagilla was not operating at capacity and needed the extra business. Unfortunately, the order’s offering price of $21 per croquet set was below the cost to produce the sets. The controller was opposed to taking a loss on the deal.
However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a croquet set is as follows:
Direct materials .....$ 7.90
Direct labor ........5.40
Variable overhead ....4.75
Fixed overhead .......3.10
Total ........$21.15
No variable selling or administrative expenses would be associated with the order. Non-unit-level activity costs are a small percentage of total costs and are therefore not considered.
Required:
1. Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supporting computations.
2. Consider the personnel manager’s concerns. Discuss the merits of accepting the order even if it decreases total profits.