Case Study

DECIDING WHETHER TO ACCEPT A SPECIAL ORDER FOR A COMPANY'S PRODUCT AT A LOWER PRICE THAN NORMAL PRICE.

The Rivet Company manufactures specialty filing cabinets. The company sells almost all of its cabinets to several well-known national manufacturers and distributors of office furniture. The plant is operating at about 70 percent of capacity. The company's normal selling price for its most popular cabinet is $80. The accountant has provided the following information about the profit on this model over the past 12 months.

In the past the company has operated solely in the Canada. However, it has just received an offer from an agent for a furniture manufacturer and distributor in Mexico to purchase 2,000 of the $80 cabinets for $70 each. Per-unit variable manufacturing costs would be the same as for existing production. Fixed manufacturing costs are allocated on the basis of direct labor costs. Total fixed manufacturing costs would not change because of increased production. Most variable selling and administrative expenses per unit would be the same, with two exceptions: A sales commission of $5 per unit paid on domestic sales would not apply to the sales in Mexico, and shipping costs would increase by $7 per unit. Fixed selling and administrative expenses would not change.

Sales (10,000 Units)		$792,000
Manufacturing Costs
Direct Materials	$250,000
Direct Labor	100,000
Manufacturing Overhead	43,200
Variable Overhead	70,000
Fixed Overhead	80,000	500,000
Gross Profit		292,000
Selling and Administrative Expenses
Variable Costs, Estimated	$130,000
Fixed Costs, Estimated	70,000	200,000
Net Profit on Line of Product		$92,000

1. Compute the additional profit or the loss that would result from accepting the special order.
2. What other factors should management consider in deciding whether to accept the offer?
3. Based on the facts given, should management accept the offer?