5. Deep Blue manufactures flotation vests in Newark, New Jersey. Deep Blue's contribution margin income statement for the most recent month contains the following data:

Deep Blue

Contribution Margin Income Statement (Variable Costing)

For Sales Volume of 33,000 Units

Total

Sales revenue $495,000

Less variable expenses:

Variable manufacturing costs (DM, DL, Variable MOH) 99,000

Variable operating expenses (selling and administrative) 103,000 Contribution margin $293,000

Less fixed expenses:

Fixed manufacturing overhead $129,000

Fixed operating expenses (selling and administrative) 85,000

Operating income (loss) $79,000

Suppose Summer Sports Cruiselines wants to buy 4,900 vests from Deep Blue. Acceptance of the order will not require any variable selling and administrative expenses. The special order will not affect fixed expenses. The Deep Blue plant has enough unused capacity to manufacture the additional vests. Summer Sports Cruiselines has offered $7 per vest, which is below the normal sale price of $15.

Requirement 1. Prepare an incremental analysis to determine whether Deep Blue should accept this special sales order

Total Order Incremental Analysis of Special Sales Order Decision Per Unit (4,900 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 ? ?

Part 2: Decision: Accept the special sales order. Accept the special sales order. Reject the special sales order.

Requirement 2. Identify long-term factors Deep Blue should consider in deciding whether to accept the special sales order.In addition to determining the special order's effect on operating profits, Deep Blue's managers also should consider the following:

Will Deep Blue's other customers find out about the lower sale price Deep Blue accepted from Summer Sports?

a. If so, will these other customers demand lower sale prices?

b. How will Deep Blue's competitors react? Will they retaliate by cutting their prices and starting a price war?

c. Will lowering the sale price tarnish Deep Blue's image as a quality brand?

d. All of the above.

e. None of the above.