Problem:
AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock shows that manufacturing costs total $29.00 per lock. An analysis of this amount indicates that $16.75 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturing overhead. The normal selling price of this model is $38.75 per lock. A chain store has offered to buy 15,000 ZForce locks from AAA Lock at a price of $20.00 each to sell in a market that would not compete with AAA Lock's regular business. AAA Lock has manufacturing capacity available and could make these locks without incurring additional fixed manufacturing overhead.
Required to do:
Question 1: Calculate the effect on AAA Lock's operating income of accepting the order from the chain store.
Question 2: If AAA Lock's costs had not been classified by cost behavior pattern, is it likely that a correct special order analysis would have been made? Explain your answer.
Question 3: Identify the key qualitative factors that AAA Lock managers should consider with respect to this special order decision.