Maui Juda Sunglasses sell for about %154 per pair. Suppose the company incurs the following average costs per pair:
|
Direct Materials
|
$38
|
|
Direct labor
|
10
|
|
Variable manufacturing overhead
|
8
|
|
Variable marketing expenses
|
2
|
|
Fixed manufacturing overhead
|
16*
|
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Total costs
|
74
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*$2,200,000 total fixed manufacturing overhead/137,500 pairs of sunglasses
Maui Juda has enough idle capacity to accept a one-time-only special order from LA Glasses for 19,000 pairs of sunglasses at $59 per pair. Maui Juda will not incur any variable marketing expenses for the order.
Required:
a) How would accept the order affect Maui Juda's operating income? In addition to the special order's effect, what other (long-term, qualitative) factors should Maui Juda's managers consider in deciding whether to accept the order?
b) Maui Juda's marketing manager, Jim Revo, argues against accepting the special order because the offer price of $59 is less than Maui Juda's $74 cost to make the sunglasses. Revo asks you, as one of Maui Juda's staff accountants, to explain whether his analysis is correct.