Reference no: EM13582157

Cornell Corporation manufactures faucets. Several weeks ago, the firm received a special-order inquiry from Yale, Inc. Yale desires to market a faucet similar to Cornell's model no. 55 and has offered to purchase 3,000 units. The following data are available:

• Cost data for Cornell's model no. 55 faucet: direct materials, $48; direct labor, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour).

• The normal selling price of model no. 55 is $180; however, Yale has offered Cornell only $117 because of the large quantity it is willing to purchase.

• Yale requires a modification of the design that will allow a $4 reduction in direct-material cost.

• Cornell's production supervisor notes that the company will incur $3,200 in additional set-up costs and will have to purchase a $4,000 special device to manufacture these units. The device will be discarded once the special order is completed.

• Total manufacturing overhead costs are applied to production based on direct labor hours. Total budgeted overhead is $840,000. This figure is based, in part, on budgeted yearly fixed overhead of $624,000 and a budgeted activity level of 24,000 direct labor hours.

• Cornell will allocate $8,000 of existing fixed administrative costs to the order as "...part of the cost of doing business."

Required:

A. One of Cornell's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Cornell currently has excess capacity? Show calculations to support your answer.