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Foster White Sunglasses sell for about $154 per pair. Suppose the company incurs the following average costs per pair:

Foster White has enough idle capacity to accept a one-time-only special order from Alaska Glasses for 16,000 pairs of sunglasses a $68 per pair. Foster White will not incur any variable marketing expenses for the order.Read the requirements

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$41
	Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
	Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . .	10
	Variable marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
	Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . .	16	*
	Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$83

.

Requirement 1. How would accepting the order affect

Foster White's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Foster White's managers consider in deciding whether to accept the order? Prepare an incremental analysis to determine the special order's effect on operating income. (Enter a "0" for any zero balances. Use parentheses or a minus sign to indicate a decrease in operating income from the special order.)

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		Total Order
Incremental Analysis of Special Sales Order Decision	Per Unit	(16,000 units)
Revenue from special order
Less variable expense associated with the order:
Variable manufacturing costs
Contribution margin
Less: Additional fixed expenses associated with the order
Increase (decrease) in operating income from the special order

In addition to determining the special order's effect on operating profits,White's managers also should consider the following:

A.

How will Foster White's competitors react? Will they retaliate by cutting their prices and starting a price war?

B.

Will Foster White's other customers find out about the lower sale price Foster White offered to Alaska Glasses? If so, will these other customers demand lower sale prices?

C.

Will lowering the sale price tarnish Foster White's image as a high-quality brand?

D.

All of the above

E.

None of the above

Requirement 2.

Foster White's marketing manager,Jim RevoJim Revo, argues against accepting the special order because the offer price of $68 is less than Foster White's $83 cost to make the sunglasses.

RevoRevo

asks you, as one of Foster White's staff accountants, to explain whether his analysis is correct.When deciding whether to accept a special order, we should compare the extra revenues we will receive against the

extra costs we will incur to fill the order. total costs of making the sunglasses. Costs that we will incur whether or not we fill the order are

irrelevant

relevant

to our decision. This is why comparing the

$68 price Alaska Glasses offered us with our $83 total cost of making and selling the sunglasses is