(Special order) For The Ages Inc. produces solid oak umbrella stands. Each stand is handmade and hand finished using the finest materials available. The firm has been operating at capacity (2,000 stands per year) for the past three years. Based on this capacity of operations, the firm’s costs per stand are as follows:
|
Material |
$ 50 |
|
Direct labor |
40 |
|
Variable overhead |
10 |
|
Fixed overhead |
30 |
|
Total cost |
$130 |
All selling and administrative expenses incurred by the firm are fixed. The average selling price of stands is $230. Recently, a large retailer approached Bill Wood, the president of For The Ages, about supplying three special stands to give as gifts to CEOs of key sup pliers. Wood estimates that the following per unit costs would be incurred to make the three stands:
|
Material |
$250 |
|
Direct labor |
350 |
|
Variable overhead |
90 |
|
Total direct costs |
$690 |
To accept the special order, the firm would have to sacrifice production of 20 regular units.
a. Identify all relevant costs that Wood should consider in deciding whether to accept the special order.
b. Assume the retailer offers to pay For The Ages a total of $3,800 for the three stands. How would accepting this offer affect For The Ages’ pre tax income?