Question:
Thomson Company has been approached by a new customer with an offer to purchase 34,000 units of Thomson's product at a price of $24 each. The new customer is geographically separated from Thomson's other customers, and there would be no effect on existing sales. Thomson normally produces 400,000 units but plans to produce and sell only 360,000 in the coming year. The normal sales price is $30 per unit. Unit cost information is as follows:
| Direct materials |
$8.00 |
| Direct labor |
10 |
| Variable overhead |
4 |
| Fixed overhead |
3.4 |
| Total |
$25.40 |
If Thomson accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity.
Required
1. Should Thomson accept the special order? By how much will profit increase or decrease if the order is accepted?
2. Suppose that Thomson's distribution center at the warehouse is operating at full capacity and would need to add capacity costing $6,000 for every 5,000 units to be packed and shipped. Should Thomson accept the special order? By how much will profit increase or decrease if the order is accepted?