Accept special sales order? Integrated Circuits, Inc. (ICI), is presently operating at 60% of capacity and manufacturing 60,000 units of a patented electronic compo¬ nent. The cost structure of the component is as follows:

Raw materials . . .

Direct labor.

Variable overhead Fixed overhead . .

$ 3.00 per unit 3.00 per unit 4.00 per unit $240,000 per year A Japanese firm has offered to purchase 20,000 of the components at a price of $12 per unit, FOB Id’s plant. The normal selling price is $16 per component. This special order will not affect any of Id’s “normal” business. Management calculated that the cost per component is $14, so it is reluctant to accept this special order.

Required:

a. Show how management came up with a cost of $14 per unit for this component.

b. Evaluate this cost calculation. Explain why it is or is not appropriate.

c. Should the offer from the Japanese firm be accepted? Why or why not?