Relevant-cost approach to pricing decisions, special order. The following financial data apply to the videotape production plant of the Dill Company for October 2007:

Budgeted Manufacturing Costs per Videotape Direct materials $1.80 Direct manufacturing labour 0.96 Variable manufacturing overhead 0.84 Fixed manufacturing overhead 1.20 Total manufacturing costs $4.80 Variable manufacturing overhead varies with respect to units produced. Fixed manufacturing overhead of $1.20 per tape is based on budgeted fixed manufacturing overhead of $180,000 per month and budgeted production of 150,000 tapes per month. The Dill Company sells each tape for $6.

Marketing costs have two components:

Variable marketing costs (sales commissions) of 5 % of dollar sales Fixed monthly costs of $65,000 During October 2007, Fyn Randell, a Dill Company salesperson, asked the president for permission to sell 1,000 tapes at $4.56 per tape to a customer not in its normal marketing channels. The president refused this special order on the grounds that the order would show a loss because the selling price was below the total budgeted manufacturing cost.

Required 1. What would have been the effect on monthly operating income of accepting the special order?

2. Comment on the president’s “below manufacturing costs” reasoning for rejecting the special order.

3. What factors would you recommend that the president consider when deciding whether to accept or reject a special order?