Special order with lost sales. Because of high sales for July, Radios, Inc., a producer of two-way radios, plans to produce and sell 20,000 radios, using all available capacity. Managers at Radios, Inc., anticipates costs for the radios for July as follows:
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Unit Manufacturing Costs
Variable Direct Materials Cost
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$1.20
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Variable Labor
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1.25
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Variable Overhead
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0.10
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Fixed Overhead
Total Manufacturing Costs per Unit
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0.85 (¼ $17,000 for July)
$3.40
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Unit Marketing Costs
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Variable
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$0.90
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Fixed
Total Marketing Costs per Unit
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2.20 (¼ $44,000 for July)
3.10
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Total Unit Costs
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$6.50
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Selling Price per Unit
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$7.00
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On June 30, Radios received a contract offer from Communication Devices to buy 10,000 radios from Radios for delivery by July 31. In place of the typical sales price of $15 per radio, the Communication Devices offer would reimburse Radios' share of both variable and fixed manufacturing costs (that is, $3.40 per unit) plus pay a fixed fee of $25,000 to Radios, Inc. Variable marketing costs would be zero for this order. Neither manufacturing nor marketing fixed costs would be affected by this order. Radios would lose 10,000 units of sales to regular customers in July, but this order would not affect sales to regular customers in any subsequent months.
Prepare a differential analysis comparing the status quo for July with the alternative case in which Radios accepts the special order. Write a brief report to Radios' management explaining why the company should or should not accept the special order.