Special Orders

Carlsbad Enterprises has a capacity to produce 400,000 computer cases per year. The company is currently producing and selling 320,000 cases per year at a selling price of $40 per case. The cost of producing and selling one case follows:

Variable manufacturing costs

$16

Fixed manufacturing costs

4

Variable selling and administrative costs

8

Fixed selling and administrative costs

2

Total costs

$30

The company has received a special order for 20,000 cases at a price of $25 per case. Because it does not have to pay a sales commission on the special order, the variable selling and administrative costs would be only $5 per case. 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 case

$25

Variable manufacturing costs

16

Fixed manufacturing costs

4

Variable selling and administrative costs

5

Fixed selling and administrative costs

2

Net loss per case

$(2 )

Required

a. What is the impact on profit t for the year if Carlsbad accepts the special order? Show computations.

b. Do you agree with the decision to reject the special order? Explain.