San Jose Sunglasses sell for about $157 per pair. Suppose that the company incurs the following average costs per pair:

San Jose has enough idle capacity to accept a one-time-only special order from Washington Shades for 25,000 pairs of sunglasses at $80 per pair. San Jose will not incur any variable marketing expenses for the order.
Requirements
1. How would accepting the order affect San Jose€™s operating income? In addition to the special order€™s effect on profits, what other (longer-term qualitative) factors should San Jose€™s managers consider in deciding whether to accept the order?
2. San Jose€™s marketing manager, Peter Bing, argues against accepting the special order because the offer price of $80 is less than San Jose€™s $84 cost to make the sunglasses. Bing asks you, as one of San Jose€™s staff accountants, to explain whether his analysis iscorrect.

Transcribed Image Text:

Direct materials Direct labor Variable manufacturing overhead Variable marketing expenses Fixed manufacturing overhead Total cost 39 15 20* 84 $2,200,000 total fixed manufacturing overhead + 110,000 pairs of sunglasses