Special Orders-The Seller's Decision
Response to the following problem:
At the end of a very mild winter, the company has enough raw materials to produce 1,000 coats, and the materials can be used only for coats. The material is very sensitive and will not be usable if it is not used immediately. The company does not expect to be able to receive the full sales price of $120 per coat, and the company needs production storage space to make room for the raw materials for its summer clothes inventory production. The company has received a special order from one of its customers for 1,000 coats at $70 per coat. The cost of making one coat (assuming a production run of 1,000 coats) is as follows:
Direct materials $25 per coat
Direct labor $40 per coat
Manufacturing overhead $20 per coat
For the manufacturing overhead, $15 per coat relates to fixed overhead, primarily wages paid to special technicians who repair the equipment used to make the coats. These technicians are hired from an outside company and will not be hired if the coats are not made. Should the company accept the special order?