Problem: The following financial data apply to the DVD production plant of the Randall Company for March 2011:
Budgeted Manufacturing Cost per DVD Pack
Direct Materials $1.60
Direct Manufacturing Labor 0.90
Variable Manufacturing Overhead 0.70
Fixed Manufacturing Overhead 1.00
Total Manufacturing Cost 4.20
Variable manufacturing overhead varies with the number of DVD packs produced. Fixed manufacturing overhead of $ 1 per pack is based on budgeted fixed manufacturing overhead of $ 150,000 per month and budgeted production of $ 150,000 packs per month. The Randall Company sells each pack for $ 5.
Marketing Costs have two components:
Variable marketing costs (sales commissions) of 5% of revenues
Fixed monthly costs of $ 65,000
During March 2011, Mark Eberson, a Randall Company salesperson, asked the president for permission to sell 1,000 packs at $ 4.00 per pack to a customer not in Randall's normal marketing channels. The president refused this special order because the selling price was below the total budgeted manufacturing costs.
1) What would have been the effect on monthly operating income of accepting the special order?
2) Comment on the president's "below manufacturing costs" reasoning for rejecting the special order.
3) What other factors should the president consider before accepting or rejecting the special order?