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.