Coco Bradley Sunglasses sell for about $150 per pair. Suppose the company incurs the following average costs per pair:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 14
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Variable marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 *
Total costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83
2,000,000 total fixed manufacturing overhead 125,000 pairs of sunglasses
Coco Bradley has enough idle capacity to accept a one-time-only special order from Oceanside Resorts for 20,000 pairs of sunglasses at $71 per pair. Coco Bradley will not incur any variable marketing expenses for the order.
Requirements
1. How would accepting the order affect Coco Bradley's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Coco Bradley's managers consider in deciding whether to accept the order?
2. Coco Bradley's marketing manager, Jim Revo, argues against accepting the special order because the offer price of $71 is less than Coco Bradley's $83 cost to make the sunglasses. Revo asks you, as one of Coco Bradley's staff accountants, to write a memo explaining whether his analysis is correct.