Jasper McKnight Sunglasses sell for about $150 per pair. Suppose the company incurs the following average costs per pair:
Direct materials ...................................................................................... $40
Direct labor .............................................................................................. 12
Variable manufacturing overhead .............................................................. 8
Variable marketing expenses ..................................................................... 3
Fixed manufacturing overhead .............................................................. 25*
Total costs .............................................................................................. $88
*$2,100,000 total fixed manufacturing overhead/84,000 pairs of sunglasses Jasper McKnight has enough idle capacity to accept a one-time-only special order from Arizona Glasses for 17,000 pairs of sunglasses at $63 per pair. Jasper McKnight will not incur any variable marketing expenses for the order.
Requirements
1. How would accepting the order affect Jasper McKnight's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Jasper McKnight's managers consider in deciding whether to accept the order?
2. Jasper McKnight's marketing manager, Nick Ferritto, argues against accepting the special order because the offer price of $63 is less than Jasper McKnight's $88 cost to make the sunglasses. Ferritto asks you, as one of Jasper McKnight's staff accountants, to explain whether his analysis is correct.