Ashford sunglasses sell for about $153 per pair. Suppose that the company incurs the following average costs per pair:

Ashford has enough idle capacity to accept a one-time special order from Water shades for 23,000 pairs of sunglasses at $67 per pair. Ashford will not incur any variable selling expenses for the order.

Requirement 1. How would accepting the order affect Ashford's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Ashford's managers consider in deciding whether to accept the order?

Prepare the analysis to determine the effect on operating income.

Expected increase in revenues ____ sunglasses x ___ ________

expected increase in expenses _____sunglasses x ___ _______

Expected ____ in operating income _________

In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Ashford's managers consider in deciding whether to accept the order?

a. Will Ashford's other customers find out about the lower sales price Ashford offered to Water shade?

b. will lowering the sale price tarnish Ashford's image as a high-quality brand?

c. how will Ashford's competitors react? Will they retaliate by cutting their prices and starting a price war?

d. all of the above

e. none of the above

Direct materials	$ 41
Direct labor	9
Variable manufacturing overhead	5
Variable selling expenses	2
Fixed manufacturing overhead	$20*
Total cost	$ 77

* $2,200,000 Total fixed manufacturing overhead/ 110,000 Pairs of sunglasses.

Prepare the analysis to determine the effect on operating income.

Requirement 2. Ashford's marketing manager, Peter Preston, argues against accepting he special order because the offer price of $67 is less than Ashford's $77 cost to make the sunglasses. Preston asks you, as one of Ashford's staff accountants, to explain whether his analysis is correct. What would you say?

When deciding whether to accept a special order, we should compare the _______________a_______ Costs that we will incur whether or not we fill the order are _b____ to our decision. This is why comparing the $67 price Water Shades offered us with our $77 total cost of making the sunglasses is ___c_____ .

The additional revenues and the additional costs that we will incur to fill the special order are __d__ If we accept the Water Shades special order, we will incur only __e__ of additional cost per pair, which is _____f__than the $67 per pair that Water shades offered. Therefore, we should ___g__ the special order to ___h___ the company's operating income.

a. choices: 1.revenues we will receive against the differential prior to filling the order 2. revenues we will receive against the differential costs we will incur to fill the order or 3. revenues prior to filling the order against the extra costs we will incur to fill the order.

b. irrelevant or relevant

c. correct or incorrect

d.relevant or irrelevant

e (amount must be calculated)

f.less or more

g. accept or reject

h. decrease or increase