Gentry Miller Sunglasses sell for $150 per pair. Suppose the company incurs the following average costs per pair:
Direct materials ......................................................................................... $43
Direct labor ................................................................................................. 13
Variable manufacturing overhead ................................................................ 9
Variable marketing expenses ....................................................................... 3
Fixed manufacturing overhead ................................................................. 16*
Total costs ................................................................................................. $84
*$2,100,000 total fixed manufacturing overhead / 131,250 pairs of sunglasses Gentry Miller has enough idle capacity to accept a one-time-only special order from Oregon Opticians for 21,000 pairs of sunglasses at $74 per pair. Gentry Miller will not incur any variable marketing expenses for the order.
Requirements
1. How would accepting the order affect Gentry Miller's operating income? In addition to the special order's effect on profits, what other (longer-term, qualitative) factors should the company's managers consider in deciding whether to accept the order?
2. Gentry Miller's marketing manager argues against accepting the special order because the offer price of $74 is less than the $84 cost to make the sunglasses. The marketing manager asks you, as one of Gentry Miller's staff accountants, to explain whether this analysis is correct.