#29

Arthur Root Sunglasses sell for about $125 per pair. Suppose the company incurs the following average costs per pair Click the icon to view the cost information) Arthur Root has enough idle capacity to accept a one-time-only special order from Montana Glasses for 23,000 pairs of sunglasses at $65 per pair. Arthur Root will not incur any variable marketing expenses for the order Read the requirements Requirement 1. How would accepting the order affect Arthur Root's operating income? In addition to the special order's effect on profits, what other longer-term qualitative) factors should Arthur Root's managers consider in deciding whether to accept the order? Prepare an incremental analysis to determine the special order's effect on operating income. (Enter a "O" for any zero balances. Use parentheses or a minus sign to indicate a decrease in operating income from the special order.) Total Order Incremental Analysis of Special Sales Order Decision Per Unit (23,000 units) Revenue from special order Less variable expense associated with the order Variable manufacturing costs Contribution margin Less: Additional fixed expenses associated with the order Increase (decrease) in operating income from the special order In addition to determining the special order's effect on operating profits, Root's managers also should consider the following: O A. Will lowering the sale price tarnish Arthur Root's image as a high-quality brand? OB. Will Arthur Root's other customers find out about the lower sale price Arthur Root offered to Montana Glasses? If so, will these other customers demand lower sale prices? OC. How will Arthur Root's competitors react? Will they retaliate by cutting their prices and starting a price war? OD. All of the above O E. None of the above Requirement 2. Arthur Root's marketing manager, Jim Revo, argues against accepting the special order because the offer price of 865 is less than Arthur Roor's 580 cost to make the sunglasses, Revo asks you, as one of Arthur Root's staff accountants, to explain whether his analysis is correct, When deciding whether to accept a special order, we should compare the extra revenues we will receive against the Costs that we will incur whether or not we fill the order are to our decision. This is why comparing the $65 price Montana Glasses offered us with our $80 total cost of making and selling the sunglasses is what that the natioetin 0 Data Table Direct materials $ 38 4. Direct labor 12 Variable manufacturing overhead ...... 6 Variable marketing expenses 20* Fixed manufacturing overhead $ 80 Total cost * $2,200,000 total fixed manufacturing overhead = 110,000 pairs of sunglasses . . . . Print Done Requirements 1. How would accepting the order affect Arthur Root's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Arthur Root's managers consider in deciding whether to accept the order? 2. Arthur Root's marketing manager, Jim Revo, argues against accepting the special order because the offer price of $65 is less than Arthur Root's $80 cost to make the sunglasses. Revo asks you, as one of Arthur Root's staff accountants, to explain whether his analysis is correct. Print Done