[12 marks] Nova Craft Canoe is an Ontario-based company located near London, Ontario. The company specializes in designing, manufacturing and selling fiberglass canoes. Lately, the company started using more advanced composite materials including aramid, basalt/Innegra, and carbon fiber. Last week, Nova Craft Canoe received a special order for 15 custom-made canoes. The regular selling price of a canoe is $589. Due to the large quantity, the price of the special order is only $565. The unit product cost for the canoes, based on activity level of 30 canoes, are:

Direct materials

$ 372.00

Direct labour

48.00

Variable manufacturing overhead

24.00

Fixed manufacturing overhead

15.00

Variable administrative expenses

6.50

Fixed administrative expenses

8.50

The fixed manufacturing overhead costs are related to the depreciation of manufacturing equipment. Since the equipment is specific to Nova Craft Canoes manufacturing needs, it cannot be resold. This order would have no effect on the companys regular sales and the order would be filled using the companys existing capacity.

Instructions

(a) If the special order is accepted, by how much will Nova Craft Canoes operating income increase or decrease? Should the special order be accepted at this price? (9 marks)

(b) Explain what sunk cost is. Provide an example (3 marks)