Luxottica manufactures fashionable sunglass frames that it sells to optometrists who then sell to patients at their medical offices. Luxottica frames sell for $280 each. The monthly sales and production average 15,000 units per month. Luxottica built the frame factory to have a monthly capacity of 20,000 units per month.

Luxottica has monthly fixed costs of $540,000 for factory overhead, and $425,000 for selling and administration. Variable cost per unit for Luxottica are $95 for direct materials, $50 for direct labor, $35 for factory overhead and $20 for distribution. These variable distribution costs are for transportation costs to optometrist’s offices.

Recently, two special order requests have been made to Luxottica.

Seattle Request: A Seattle-based chain of independent opticians have made the following offer: One time order for 1,000 units at a reduced price of $222 per unit. The Seattle chain would pay all transportation costs. (Luxottica’s cost accountant says that there will be an additional cost of $2,500 of fixed selling and administration for Luxottica if the Seattle order is accepted.)

Boise Request: A Boise-based chain made the following offer: One-time order of 6,000 units at a special price of $200 per unit. Boise would pay all transportation costs. (Luxottica’s cost accountant says that there will be an additional cost of $3,100 of fixed selling and administration for Luxottica if the Boise order is accepted.)

Dr. Iris Vitreous is the CEO of Luxottica and needs help in making the decision. She wants to know if the Seattle, or the Boise, or both requests should be accepted now. After talking with the cost accountant, Dr. Vitreous was informed that that the current factory and labor situation means no overtime can be utilized for the next twelve months by Luxottica.

You are the new MBA hire at Luxottica and Dr. Vitreous has asked you for a memo with supporting appendices to analyze and make a recommendation of acceptance or rejection of the above requests.

Required

This is an individual activity and is to be done on your own, without collaboration with others. Write a memo with appendices. Suggestions for constructing your memo and appendices are outlined below.

Memo and Appendices

The memo should address the following issues about relevant decisions:

What is the basis of making short-term business decisions?

What course of action would you recommend, to Dr. Vitreous' original request, based on your financial analysis of the scenarios? (Including a summary table works well here in your memo!)

What non-quantitative issues should management consider before making a final decision for these special orders?

Is there another course of action that you would recommend?

The appendices should provide a reference source for the memo. The following items must be included.

Show a differential analysis of accepting Seattle only, Boise only, and both Seattle & Boise being accepted now. Each analyses must show the increase/(decrease) in profit/(loss) of accepting the special order. Formatting of this type of information is very important to Dr. Iris Vitreous.

With the given cost structure of the scenarios above, what is relevant and irrelevant to the above scenarios?

Having a definitions page for decision terms is recommended.

Feel free to add items that make for a better response to Dr. Vitreous.