16

JJ and Company manufactures clocks and expects to sell 100,000 units this year at a price of $31 per clock. Planned per-unit manufacturing costs at that level (100,000 units) of production are as follows:

PRODUCT COST	PER UNIT COST
Direct materials	$ 9 per unit
Piece-rate direct labor	$ 4 per unit
Variable overhead (This represents the variable portion of electricity)	$ 1 per unit
Fixed manufacturing costs (This represents the committed, unavoidable cost of rent on a building--due to an unbreakable long-term lease)	$ 7 per unit

In January of this year, a new customer approached JJ and offered to buy 20,000 clocks at $16 each (a very healthy $15 off the regular selling price). Due to current excess capacity, JJ can produce these additional units with no change in total fixed manufacturing costs and with no change to per-unit variable manufacturing costs.

Should JJ and Company accept this special order? Pick the best answer below.

		JJ should ACCEPT this order, because the relevant revenues (cash inflows) are $16 per clock and the relevant costs (cash outlflows) are only $14 per clock. Thus, JJ "gains" $2 on each clock.
		JJ should REJECT this order, because the relevant revenues (cash inflows) are $16 per clock and the relevant costs (cash outlflows) are $21 per clock. Thus, JJ "loses" $7 on each clock.
		JJ should REJECT this order, because the significant discount from the regular selling price means that JJ "loses" $15 on each clock.
		JJ should REJECT this order, because the relevant revenues (cash inflows) are only $16 per clock and the relevant costs (cash outlflows) are $36 per clock ($21 in costs shown plus the $15 discount from the regular selling price). Thus, JJ "loses" $20 on each clock.