Sino-Afro Electronics manufactures different optical switch for networking uses in different industries. During 2013, the company completed an order for a special optical switch for a new customer, Ethio-telecom. This customer did not order any other products during the year. Data concerning that order follow:
Data related to Ethio-telecom order
Selling price
$295 per unit
Units ordered
100 units
Direct materials
$264 per unit
Direct labor hours
0.50 hrs per unit
Direct labor rate
$25 per direct labor hr
Currently, the company is concerned whether to accept this special order, thus, contracts your professional advice. The company traditionally uses direct labor hours to allocate manufacturing overhead costs. Total direct labor hours was estimated to be 20,000 in 2013. Other operating data for the year 2013 is provided in the following table. Note that 80% of the overhead costs are related to production while the remaining 20% are selling and administrative.
Required:
a) Shall the company accept the special order if the traditional costing system is in use? Why?
b) Shall the company accept the special order if activity-based costing system is in use? Why?
c) Does the costing system affect your advice regarding acceptance of the special order? Why?