Question - International Ltd. makes sport wear glasses. A domestic sporting goods chain recently submitted a order for 4000 sport wear glasses. International Ltd. was not operating at capacity and could use the extra business. Unfortunately the orders offering price of $17 per sport wear glasses was below the cost to produce the glasses. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favour of accepting the order even though a loss would be incurred. It would avoid the problem of lay offs, and would help maintain the community image of the company.
The full cost to produce a sport wear glasses is presented below.
Direct Materials- $ 6.50
Direct Labour - $ 5
Variable Overhead - $ 3.25
Fixed Overhead - $ 2.50
Total - $ 17.50
No variable selling or administrative expenses would be associated with the order.
Required:
1) Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supported computations.
2) Consider the personnel manager concerns. Discuss the merits of accepting the order even if it decreases total profits?