Relevant-cost approach to pricing decisions, special order.

Relevant-cost approach to pricing decisions, special order. The following financial data apply to the videotape production plant of the Dill Company for October 2009:

Variable manufacturing overhead varies with the number of units produced. Fixed manufacturing overhead of $1 per tape is based on budgeted fixed manufacturing overhead of $150,000 per month and budgeted production of 150,000 tapes per month. The Dill Company sells each tape for $5. Marketing costs have two components:

  • Variable marketing costs (sales commissions) of 5% of revenues
  • Fixed monthly costs of $65,000

During October 2009, Lyn Randell, a Dill Company salesperson, asked the president for permission to sell 1,000 tapes at $4.00 per tape to a customer not in Dill’s normal marketing channels. The president refused this special order because the selling price was below the total budgeted manufacturing cost.

1. What would have been the effect on monthly operating income of accepting the special order?

2. Comment on the president’s “below manufacturing costs” reasoning for rejecting the special order

3. What other factors should the president consider before accepting or rejecting the special order?

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