Cindy Burnson, the manager of Fondlike company, was agonizing over an offer for an order requesting 7,000 boxes of birthday cards. Fondlike was operating at 70 percent of its capacity and could use the extra business. unfortunately, the orders offering price of $7.75 per box was below the cost to produce the cards. The controller was opposed to walking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a box of birthday cards is:
Direct materials $2.00
Direct Labor $3.00
Variable overhead $1.50
fixed overhead $2.50
Total $9.00
the order is from a customer in a region not ordinarily serviced by the company. No variable selling or administrative expenses would be associated with the order. Nonunit level cost are a small percentage of total cost and therefore not considered.
Required
A. assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supporting computations.
B. Consider the personnel manager's concerns. Discuss the merits of accepting the order even if it decreased total profits.