Sera Shade Sunglasses sell for about $151 per pair. Suppose the company incurs the following average costs per pair:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 7
Variable marketing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 4
Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 *
Total costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79
$2,100,000 total fixed manufacturing overhead / 131,250 pairs of sunglasses
Sera Shade has enough idle capacity to accept a one-time-only special order from Ocean view Hotels for 23,000 pairs of sunglasses at $64 per pair. Sera Shade will not incur any variable marketing expenses for the order.
Requirements
1. How would accepting the order affect Sera Shade's operating income? In addition to the special order's effect on profits, what other (longer-term, qualitative) factors should the company's managers consider in deciding whether to accept the order?
2. Sera Shade's marketing manager argues against accepting the special order because the offer price of $64 is less than the cost to make the sunglasses. The marketing manager asks you, as one of Sera Shades' staff accountants, to explain whether this analysis is correct.