Question

San Jose Sunglasses sell for about $ 157 per pair. Suppose that the company incurs the following average costs per pair:
Direct materials ............. $ 39
Direct labor ............... 15
Variable manufacturing overhead ...... 8
Variable selling expenses .......... 2
Fixed manufacturing overhead ....... 20*
Total cost ................ $ 84

*$ 2,200,000 Total fixed manufacturing overhead / 110,000 Pairs of sunglasses
San Jose has enough idle capacity to accept a one- time- only special order from Washington Shades for 25,000 pairs of sunglasses at $ 80 per pair. San Jose will not incur any variable selling expenses for the order.

Requirements
1. How would accepting the order affect San Jose’s operating income? In ­addition to the special order’s effect on profits, what other (longer- term qualitative) ­factors should San Jose’s managers consider in deciding whether to accept the order?
2. San Jose’s marketing manager, Peter Bing, argues against accepting the special order because the offer price of $ 80 is less than San Jose’s $ 84 cost to make the sunglasses. Bing asks you, as one of San Jose’s staff accountants, to explain whether his analysis is correct. What would yousay?


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  • CreatedJanuary 16, 2015
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