Reference no: EM132746624

USA company has one primary product and has reported annual income (for the past year) as follows:

Sales (600 x $60) $36,000

Cost of goods sold -33,000

Gross margin $ 3,000

Operating expenses 2,000

Operating income (before tax) $1,000

There were no beginning or ending inventories. All operating expenses are fixed costs. Product costs were as follows:

Direct materials (600 units x $10) $ 6,000

Direct labor (600 units x $16) 9,600

Variable manufacturing overhead (600 units x $9) 5,400

Fixed manufacturing overhead 12,000

Total cost of goods sold $33,000

Avg. cost per unit (where # units sold equals # units produced = 600 units) $55

USA company has received a special order from a Canadian firm to purchase 450 units during the upcoming year at $54 each.

Problem 1. Make a differential analysis of the decision to accept or reject the special order, assuming USA company does not have excess capacity (i.e., 600 units is current annual production capacity).

Problem 2. When making a special order decision, what non-quantitative (aka qualitative) aspects of the decision should USA company consider? Be sure to identify (list) at least one qualitative item in favor of each decision alternative (i.e., accept or reject order).

Problem 3. In relation to requirement 1, the sales manager of USA remarked: "variable costs are always relevant, and fixed costs are never relevant." Do you agree with this remark? Why or why not?