Pellinore Company has received a special order from Maxwell, Inc. Pellinore incurs $150 in variable costs to manufacture each unit, and assigns $30 in fixed costs to each unit as well. Maxwell requires product modifications that will require an extra $15 in variable costs per unit. Pellinore ordinarily charges $220 per unit. Maxwell has offered $200,000 for the entire order of 1,000 units. Pellinore has enough production capacity to fill the order in addition to its regular production needs.

Determine whether it would be financially beneficial for Pellinore to accept the order, and calculate the net benefit.

First, make a column for each decision alternative.

yy Pellinore can accept the special order or reject it (see columns to the right).

Next, place the relevant costs and benefits of each alternative in the columns.

yy The regular variable cost of $150 per unit will be incurred for the 1,000 units if the order is accepted, but not if it is rejected, so this is relevant.

yy Fixed costs will not change if the order is accepted, so this is not relevant.

yy The additional cost of $15 per unit will be incurred for the 1,000 units if the order is accepted, but not if it is rejected, so this is relevant.

yy The regular price of $220 applies only to regular sales, which will be incurred whether the order is accepted or not, so this is not relevant.

yy The $200,000 offer will be received if the order is accepted, but not if it is rejected, so this is relevant.

Finally, find the net benefit of the decision and determine which alternative results in higher profit.

yy The net benefit of the decision is $35,000, and favors accepting the special order.

Transcribed Image Text:

Accept Reject VC $(150,000) $0 Add'l (15,000) 0 Offer 200,000 0 Total $ 35,000 $0 L'$35,000