Dexter Company has been approached by a new customer with an offer to purchased 1,400 units of Dexter's products at a price of $3 each. The new customer is geographically separated from Dexter's other customers, and there would be no effect on existing sales. Dexter normally produces 10,000 units but only plans to produce and sell 8,000 in the coming year. The normal sales price is $5 per unit. Unit cost information is as follows:
- Direct Materials $.75
- Direct Labor .80
- Variable Overhead .40
- Fixed Overhead 2.00
- Total $3.95
If Dexter accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity. However, the distribution center at the warehouse is operating at full capacity and would need to add capacity costing $1,000 for every 5,000 units to be packed and shipped.
Required:
Should Dexter accept the special order?By how much will profit increase or decrease if the order is accepted?
Dexter Company has been approached by a new customer with an offer to purchased 1,400 units of Dexter's products at a price of $3 each. The new customer is geographically separated from Dexter's other customers, and there would be no effect on existing sales. Dexter normally produces 10,000 units but only plans to produce and sell 8,000 in the coming year. The normal sales price is $5 per unit.