Lucas, Inc., manufactures lamps and lighting fixtures. A national hotel chain recently sub¬

mitted a special order for 4,000 desk lamps. Lucas was not operating at capacity and could use the extra business. Unfortunately, the order's offering price of $14 per lamp was below the cost to produce the lamps. The controller was opposed to taking a loss on the deal. How¬

ever, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the commu¬

nity image of the company. The full cost to produce a desk lamp is presented below;

No variable selling or administrative expenses would be associated with the order.
Nonunit-level activity costs are a small percentage of total costs and therefore not considered.
Required:
1. Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supporting computations.
2. Consider the personnel manager's concerns. Discuss the merits of accepting the order even if it decreases total profits.

Transcribed Image Text:

Direct materials $ 6.50 Direct labor 5.00 Variable overhead 1.50 Fixed overhead 2.50 Total $15.50