Reference no: EM132976834
Problem - Evaluating a Special Order - Flame Company manufactures gas grills and is considering expanding production. A distributor has asked the company to produce a special order of 8,000 grills to be sold overseas. The grills would be sold under a different brand name and would not influence Flame Company's current sales. The plant is currently producing 95,000 units per year. The company's maximum capacity is 100,000 units per year, so the company would have to reduce the production of units sold under its own brand name by 3,000 units if the special order is accepted. The company's income statement for the previous year is presented below:
Sales (95,000 units) $7,125,000
Cost of goods sold:
Direct materials $2,375,000
Direct labor 1,900,000
Manufacturing overhead 1,425,000 5,700,000
Gross Profit 1,425,000
Selling expenses 575,000
Administrative expenses 237,500 812,500
Net income $ 612,500
The company's variable manufacturing overhead is $ 10 per unit and the variable selling expense is $5 per unit. The administrative expense is com0pletely fixed and would increase by $5,000 if the special order is accepted. There would be no variable selling expense associated with the special order, and variable manufacturing overhead per unit would remain constant.
The company's direct labor cost per unit for the special order would increase 20% while direct materials cost per unit for the special order would increase 10%. Fixed manufacturing overhead and fixed selling expense would not change.
Required - If the distributor has offered to pay $65 per unit for the special order, should the company accept the offer? Justify your answer.
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