Eye on World, Inc., has a capacity of 200,000 computer monitors per year. The company is currently producing and selling 160,000 monitors per year at a selling price of $400 per monitor. The cost of producing and selling one monitor at the 160,000 unit level of activity follows:
Variable Manufacturing Costs …………………………………………………………… $160
Fixed Manufacturing Costs …………………………………………………………………… 40
Variable Selling and Administrative Costs ……………………………………………… 80
Fixed Selling and Administrative Costs …………………………………………………… 20
Total Costs………………………………………………………………………………………… $300
The company has received a special order for 10,000 monitors at a price of $250 per monitor.
Because it need not pay a sales commission on the special order, the variable selling and administrative costs would be only $50 per monitor. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:
Selling Price per Monitor ……………………………………………………………………. $250
Variable Manufacturing Costs ………………………………………………………………. 160
Fixed Manufacturing Costs ……………………………………………………………………. 40
Variable Selling and Administrative Costs ………………………………………………. 50
Fixed Selling and Administrative Costs …………………………………………………… 20
Net Loss per Monitor …………………………………………………………………………. $(20)
Management is reviewing its decision and wants your advice. Should Eye on World have accepted the special order? Show your computations.