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SPECIAL-ORDER DECISION, QUALITATIVE ASPECTS
Direct materials $1.15
Direct labour 2.00
Variable overhead 1.10
Fixed overhead 1.00
Total $5.25
Point 1: Later that day, Louis and Yatika met over coffee. Louis sympathized with Yatika's concerns and suggested that the two of them rethink the special-order decision. He offered to determine relevant costs if Yatika would list the activities that would be affected by a layoff. Yatika eagerly agreed and came up with the following activities: an increase in the Employment Insurance rate from 1 percent to 2 percent of total payroll, notification costs to lay off approximately 20 employees, and increased costs of rehiring and retraining workers when the downturn was over.
Louis determined that these activities would cost the following amounts:
Required:
Question 1. Assume that the company will accept the order only if it increases total profits. Should the company accept or reject the order? Provide supporting computations.
Question 2. Consider the new information on activity costs associated with the layoff. Should the company accept or reject the order? Provide supporting computations.
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