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Question
Peters, Inc. sells a single product and reports the following results from sales of 100,000 units:
Sales ($45 unit) ... $4,500,000
Less costs and expenses:
Direct materials ($16/unit). $1,600,000
Direct labor ($9/unit).. 900,000
Variable overhead ($3/unit)... 300,000
Fixed overhead ($8.10/unit).......... 810,000
Variable administrative ($4.50/unit). 450,000
Fixed administrative ($4/unit)... 400,000
Total costs and expenses... $(4,460,000)
Operating income $ 40,000
A foreign company wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Peters will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order.
Required:
(1) Should Peters accept the order if it does not affect regular sales? Explain.
(2) Assume that Peters can accept the special order only by giving up 5,000 units of its normal sales. Should Peters accept the special order under these circumstances?
Answer
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