Special-Order Decision
Rianne Company produces a light fixture with the following unit cost:
|
Direct materials
|
$2
|
|
Direct labor
|
1
|
|
Variable overhead
|
3
|
|
Fixed overhead
|
2
|
|
Unit cost
|
$8
|
The production capacity is 300,000 units per year. Because of a depressed housing market, the company expects to produce only 180,000 fixtures for the coming year. The company also has fixed selling costs totaling $500,000 per year and variable selling costs of $1 per unit sold. The fixtures normally sell for $12 each.
At the beginning of the year, a customer from a geographic region outside the area normally served by the company offered to buy 100,000 fixtures for $7 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any vari- able selling costs.
Required
Should the company accept the order? Provide both qualitative and quantitative justification for your decision. Assume that no other orders are expected beyond the regular business and the special order.