Carlsbad Enterprises has a capacity to produce 400,000 computer cases per year. The company is currently producing and selling 320,000 cases per year at a selling price of $40 per case. The cost of producing and selling one case follows:
Variable manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . $16
Fixed manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . 4
Variable selling and administrative costs . . . . . . . . . . . . . . 8
Fixed selling and administrative costs . . . . . . . . . . . . . . . . . 2
Total costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30
The company has received a special order for 20,000 cases at a price of $25 per case. Because it does not have to pay a sales commission on the special order, the variable selling and administrative costs would be only $5 per case. The special order would have no effect on total fixed costs.
The company has rejected the offer based on the following computations:
Selling price per case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25
Variable manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . 16
Fixed manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . 4
Variable selling and administrative costs . . . . . . . . . . . . . . 5
Fixed selling and administrative costs . . . . . . . . . . . . . . . . . 2
Net loss per case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2)
Required
a. What is the impact on profit for the year if Carlsbad accepts the special order? Show computations.
b. Do you agree with the decision to reject the special order? Explain.