Westwood Gear, Inc., recently received a special order to manufacture 10,000 units for a Canadian company. This order specified that the selling price per unit should not exceed $50. Since the order was received without the effort of the sales department, no commission would be paid. However, an export handling charge of $5 per unit would be incurred. Management anticipates that acceptance of the order will have no effect on other sales.
The company is now operating at 80 percent of capacity, or 80,000 units, and expects to continue at this level for the coming year without the Canadian order. Unit costs based on estimated actual capacity for the coming year include:
| Selling price |
$65.00 |
| Expenses: |
|
| Direct materials |
$18.00 |
| Direct labor |
16.00 |
| Variable factory overhead |
10.00 |
| Fixed factory overhead |
3.00 |
| Sales commissions |
5.00 |
| Other marketing expenses (two-thirds variable) |
3.00 |
| General expenses (60% fixed) |
5.00 |
| Total |
$60.00 |
Required:
Prepare an analysis showing the effect on profits if the special order is accepted by the company. Based on your analysis, should the order be filled, and why?