Maui Jane Sunglasses sell for about $150 per pair. Suppose the company incurs the following average costs per pair:
Direct materials........................................................................................... $40
Direct labour............................................................................................... 12
Variable manufacturing overhead ............................................................... 8
Variable marketing expenses....................................................................... 4
Fixed manufacturing overhead.................................................................... 20*
Total costs................................................................................................... $84
Maui Jane has enough idle capacity to accept a one-time-only special order from Vision Lenses for 20,000 pairs of sunglasses at $76 per pair. Maui Jane will not incur any variable marketing expenses for the order.
Requirements
1. How would accepting the order affect Maui Jane’s operating income? In addition to the special order’s effect on profits, what other (longer-term qualitative) factors should Maui Jane’s managers consider in deciding whether to accept the order?
2. Maui Jane’s marketing manager, Jim Revo, argues against accepting the special order because the offer price of $76 is less than Maui Jane’s $84 cost to make the sunglasses. Revo asks you, as one of Maui Jane’s staff accountants, to write a memo explaining whether his analysis is correct.