Accept special sales orders? John Inc. is presently operating at 50% capacity and manufacturing 50,000 units of a patented electronic component. The cost structure of the component is as follows.
Raw material $ 1.50 per unit
Direct Labor 1.50 per unit
Variable Overhead 2.00 per unit
Fixed Overhead $ 1.00.000 per year
A Mexican firm has offered to purchase 30,000 0f the components at a price of $6 per unit, the normal selling price is $8 per component. This special offer will not affect any of John Inc,s normal business. Management calculated that the cost per component is $7 so it is reluctant to accept this special order.
a) Show how management came up with a cost of $7 per unit for this component.
b) Evaluate this cost calculation. Explain why it is or is not appropriate.
c) Should the offer from the Mexican firm be accepted? Why or Why not?