(Special order) Hydraulic Engineering, located in Toronto, manufactures a variety of industrial valves and pipe fittings sold to customers in the United States. Currently, the company is operating at 70 percent of capacity and is earning a satisfactory return on investment.

Prince Industries Ltd. of Scotland has approached Hydraulic’s manage¬ ment with an offer to buy 120,000 units of a pressure valve. Prince manufac¬ tures an almost identical valve pressure valve, but a fire in Prince’s valve plant has closed its manufacturing operations. Prince needs the 120,000 valves over the next four months to meet commitments to its regular cus¬ tomers; the company is prepared to pay $19 each for the valves, FOB ship¬ ping point.

Hydraulic Engineering’s product cost for the pressure valve based on current attainable standards is

Additional costs incurred in connection with sales of the pressure valve in¬ clude 5 percent sales commissions and $1 freight expense per unit. How-

ever, the company does not pay sales commissions on special orders that come directly to management.
In determining selling prices, Hydraulic adds a 40 percent markup to product cost, which provides a $28 suggested selling price for the pressure valve. The marketing department, however, has set the current selling price at $27 to maintain market share.
Production management believes that it can handle the Prince Industries order without disrupting its scheduled production. The order would, how¬ ever, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs.
If management accepts the order, Hydraulic will manufacture 30,000 pressure valves and ship them to Prince Industries each month for the next four months. Shipments will be made in weekly consignments, FOB ship¬ ping point.

a. Determine how many additional direct labor hours would be required each month to fill the Prince Industries order.

b. Prepare an incremental analysis showing the impact of accepting the Prince Industries order.
C. Calculate the minimum unit price that Hydraulic Engineering’s manage¬ ment could accept for the Prince Industries order without reducing net income.

d. Identify the factors, other than price, that Hydraulic Engineering should consider before accepting the Prince Industries order.
(CMA adapted)

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Direct material Direct labor Manufacturing overhead Total cost $ 5 6 $20 Manufacturing overhead is applied to production at the rate of $18 per sta dard direct labor hour. This overhead rate is made up of the following cor ponents: Variable factory overhead Fixed factory overhead-direct Fixed factory overhead-allocated $ 6 8 4 Applied manufacturing overhead rate $18