Question - Shangai Exporters, LTD produces wall mounts for flat panel television sets. The forecasted income statement for 2014 is as follow:
Sales ($44 per unit) - $4,400,000
Cost of good sold ($32 per unit) - (3,200,000)
Gross profit - 1,200,000
Selling expenses ($3 per unit) - (300,000)
Net Income - $900,000
Of the production costs and selling expenses, $800,000 and $100,000 respectively are fixed.
Shanghai exporters received a special order from a hospital supply company offering to buy 12,500 wall mounts for $30.00. If it accepts the order, there will be no additional selling expenses, and there is currently sufficient excess capacity to fill the order. The company's sales manager argues for rejecting the order because "we are not in the business of paying $32.00 to make a product to sell for $30.00"
Do you think the company should accept the special order? Should the decision be based only on the profitability of the sale, or are there other issues that Shanghai should consider? Explain.