My company makes small gasoline-powered motors that are used in lawn mowers. We have been growing steadily for 5 years now and are now operating at full capacity. We just completed a new addition onto our plant and new equipment at a cost of $7,800,000, which in turn increase our manufacturing capacity to 100,000 motors annually. The plant and equipment will be depreciated on a straight-line basis over 10 years.
Sales of motors were 60,000 units prior to the competition of the additional capacity. Cost records indicated that manufacturing costs had totaled $60 per motor, of which $48 per motor was considered to be variable manufacturing costs. My company has used the volume of activity at full capacity as the basis for applying fixed manufacturing overhead. The normal selling price is $80 per motor and my company pays a 5% commission on the sale of its motors.
LawnPro.com offered to purchase 35,000 motors at a price of $60 per unit to test the viability of distributing lawn motor replacement motors through its Web site. My company would be expected to produce the motors, store them in its warehouse, and ship individual motors to LawnPro.com customers. As orders are placed directly through the LawnPro.com Web site, they would be forwarded instantly to my company. No commission will be paid on this special sales order, and freight charges will be paid by the customer purchasing the motor.
Assume that with the additional plant capacity, sales of motors in my company's regular market are expected to increase by 33.33% in the coming 12 months. Identify all the relevant costs that my company should consider in evaluating the special sales order from PawnPro.com.