Special order decision and considerations (Learning Objective 3)

Gentry Miller Sunglasses sell for $150 per pair. Suppose the company incurs the following average costs per pair:

Direct materials	$43
Direct labor	13
Variable manufacturing overhead	9
Variable marketing expenses	3
Fixed manufacturing overhead	16*
Total costs	$84
*$2,100,000 total fixed manufacturing overhead / 131,250 pairs of sunglasses

Gentry Miller has enough idle capacity to accept a one-time-only special order from Oregon Opticians for 21,000 pairs of sunglasses at $74 per pair. Gentry Miller will not incur any variable marketing expenses for the order.

Requirements

1. How would accepting the order affect Gentry Millers operating income? In addition to the special orders effect on profits, what other (longer-term, qualitative) factors should the companys managers consider in deciding whether to accept the order?

2. Gentry Millers marketing manager argues against accepting the special order because the offer price of $74 is less than the $84 cost to make the sunglasses. The marketing manager asks you, as one of Gentry Millers staff accountants, to explain whether this analysis is correct.