The current annual budget for King & Co., makers of baseball caps, is summarized as follows:
...............................................................................................£000
Sales (1 million caps @ £5 each)...................................... 5,000
Less manufacturing cost of caps sold............................. 3,000
Gross margin...................................................................... 2,000
Less sales and administration expenses......................... 1,500
Operating income.................................................................. 500
King’s fixed manufacturing costs were £2.0 million and its fixed sales and administration costs were £1.0 million. Sales commission of 5% of sales is included in the sales and administration expenses. The company is approaching the end of the current financial year and looks as though it will exceed its budgetary targets. King’s has just been asked by its local First Division football club to make a special order of 50,000 caps in the club colors to celebrate the club’s promotion to the Premier League; the club is willing to pay £4 a cap. However, a special badge of the club’s emblem would have to be made for each cap. Even though King & Co. has the necessary capacity to produce the order, the managing director has decided to reject the club’s offer of £200,000 for the 50,000 caps. He explained his decision by saying,

The club’s offer is too low. I know we would save the sales commission but the badges alone will cost twice as much as that, and it costs us £4.50 to make our ordinary caps. I’m willing to cut our usual 10% profit margin to 5%, or even less, to get this order but I’m not prepared to do it for nothing and I’m certainly not prepared to make a loss on the deal.

Task:
Comment on the managing director’s decision.