Special order pricing (Adapted from CMA, December 1988) The Sommers Company, located in southern Wisconsin, manufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment.

Management has been approached by Glasgow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glasgow Industries manu¬ factures a valve that is almost identical to Sommers's pressure valve. However, a fire in the Glasgow Industries' valve plant has shut down its manufacturing oper¬ ations. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers. The company is prepared to pay $19 each for the valves, FOB shipping point, that is, freight and transportation insurance expenses are paid by the buyer, Glasgow Industries Ltd.

Sommers's product cost, based on current attainable standards, for the ores- sure valve is as follows:

Additional costs incurred in connection with sales of the pressure valve in- c ude sales commissions of 5% and freight expense of $1 per unit. However the company does not pay sales commissions on special orders that come directly to management. ’
In determining selling prices, Sommers adds a 40% markup to product cost, is provides a $28 suggested selling price for the pressure valve. The marketing department, however, has set the current selling price at $27 in order to maintain the company's market share.
Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, re¬ quire additional fixed manufacturing support costs of $12,000 per month in the form of supervision and clerical costs.
If management accepts the order, 30,000 pressure valves will be manufac¬ tured and shipped to Glasgow Industries each month for the next four months. Shipments will be made in weekly consignments, FOB shipping point.
REQUIRED

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

(b) Evaluate the impact of accepting the Glasgow Industries order on Sommers's profit.

(c) Calculate the minimum unit price that Sommers's management could accept for the Glasgow Industries order without reducing its profits.

(d) Identify the factors, other than price, that Sommers Company should con¬ sider before accepting the Glasgow Industries order.(LO 2, 3)

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Direct materials Direct labor Manufacturing support Total cost $ 5.00 6.00 9.00 $20.00 Manufacturing support costs are applied to production at the rate of $18 per standard direct labor hour. This rate is made up of the following components: Variable manufacturing support Fixed manufacturing support Cost driver rate $ 6.00 12.00 $18.00