Question

Shasta Co. manufactures designer pillows for college dorm rooms. Each line of pillow is endorsed by a high-profile sports star and designed with special elements selected by the sports star. During the most recent year, Shasta Co. had the following operating results while operating at 80 percent (115,200 units) of its capacity:
Sales revenue ........ $1,382,400
Cost of goods sold ...... 1,036,800
Gross profit ........ $345,600
Operating expenses .... 230,400
Net operating income ... $ 115,200

Shasta’s cost of goods sold and operating expenses are 75 percent variable and 25 percent fixed.
Shasta has received an offer from Honeysuckle Community College to design a pillow endorsed by a soccer star who graduated from the college and produce 25,000 pillows for $10 each (for a total cost of $250,000). These pillows would be sold at the college bookstore. Acceptance of the order would require a $50,000 endorsement fee to the soccer star, but no other increases in fixed operating expenses.

Required:
1. Prepare an incremental analysis of the special order.
2. Should Shasta accept this special order?
3. If Shasta were operating at full capacity, would your answer in requirement 2 change? If so, what price would Shasta require for the special order?



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  • CreatedFebruary 27, 2015
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