Cornell Corporation manufactures facuets. Several weeks ago, the firm recieved a speical-order inquiry from Yale, Inc. Yale desires to market a faucet similar to Cornell's model no 55 and has offered to purchase 3,000 units. the fowllowing data is available:
cost data for Cornell's model no. 55 faucet: direct materials, $45; direct labor, $30 (2hrs at $15 per hr); and manufacturing overhead, $70.
The normal selling price of model no 55 is $180, however Yale has offered Cornell only $115 because of the large quanitiy it is willing to purchase.
-Yale requires a design modification that will allow a $4 reduction in direct material cost.
-Cornell's production supervisor notes that the company will incur $8700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture these units. The device will be discarded once the speical order is completed.-The manufacturing overhead costs are applied to production at the rate of $35 per labor hr. This figure is based in part on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labor hrs
Cornell will allocate $5,000 of existing fixed administrative costs to the order as "part of the cost of doing business".
Required:
A. One of Cornell's staff accountants wants to reject the speical order because "financially, its a loser". Do you agree with this conclusion if Cornell currently has excess capactiy" Show calculations to support your answer.
B. If Cornell currently has no excess capactiy, should the order be rejected from a financial perspective? Breifly explain.
C. Assume that Cornell currently has no excess capacity. Would outsourcing be an option that Cornell could consider if management truly wanted to do business with Yale? Breifly discuss, citing several key considerations for Cornell to answer.