Problem: D. Lawrance designs and manufactures fashionable mens clothing. For the coming year the company has scheduled production of 40,000 suede jackets. Budgeted costs for this product are as follows:
Unit Costs Total
(40,000 units)
Variable manufacturing costs $50 $2,000,000
Variable selling expenses 20 800,000
Fixed manufacturing costs 10 400,000
Fixed operating expenses 5 200,000
Total costs and expenses 85 3,400,000
The management of D Lawrance is considering a special order from Discount Apparel for an additional 10,000 jackets. These jackets would carry the Discount Apparel label rather than the D Lawrance label. In all other respects, they would be identical to the regular D Lawrance jackets. Although D Lawrance regularly sells its jackets to retail stores at a price of $150 each, Discount Apparel has offered to pay only $80 per jacket. However, because no sales commissions would be involved with this special order, D Lawrance will incur variable selling expenses of only $5 per unit on these sales, rather than the $20 it normally incurs. Accepting the order would cause no change in the company's fixed manufacturing costs or fixed operating costs. D Lawrance has enough plant capacity to produce 55,000 jackets per year.
INSTRUCTIONS:
Q1. Using incremental revenue and incremental costs, compute the expected effect of accepting this special order on D Lawrance operating income.
Q2. Briefly discuss any other factors that you believe D Lawrance management should consider in deciding whether to accept the special order. Include non-financial as well as financial considerations.