Maui Juda Sunglasses sell for about $154 per pair. Suppose the company incurs the following average costs per pair:
Direct materials........................................................................................... $38
Direct labour............................................................................................... 10
Variable manufacturing overhead ............................................................... 8
Variable marketing expenses....................................................................... 2
Fixed manufacturing overhead.................................................................... 16*
Total costs................................................................................................... $74
Maui Juda has enough idle capacity to accept a one-time-only special order from East Coast Glasses for 19,000 pairs of sunglasses at $49 per pair. Maui Juda will not incur any variable marketing expenses for the order.
Requirements
1. How would accepting the order affect Maui Juda’s operating income? In addition to the special order’s effect on profits, what other (longer-term, qualitative) factors should Maui Juda’s managers consider in deciding whether to accept the order?
2. Maui Juda’s marketing manager, Jim Revo, argues against accepting the special order because the offer price of $49 is less than Maui Juda’s $74 cost to make the sunglasses. Revo asks you, as one of Maui Juda’s staff accountants, to explain whether his analysis is correct.