Big Bend Machinery

Morgan Miller, sales manager for Big Bend Machinery, has been asked by a potential foreign customer to sell 10,000 units of a certain gear for $10 per unit. Big Bend normally sells this item for $15 per unit, but it has had some excess manufacturing capacity in recent months. It is anticipated that this would be a one-time-only order from this customer. The product unit cost report for this type gear is as follows:

Direct materials ...................................................................................$ 3.00

Direct labor ........................................................................................... 2.50

Variable manufacturing overhead ........................................................ 1.25

Fixed manufacturing overhead ............................................................ 2.50

Variable selling and administrative expense ....................................... 1.75

Fixed selling and administrative expense ........................................... 2.25

Total per unit cost ..............................................................................$13.25

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After looking at the product cost report, Miller informs the customer, I may not be an accountant, but I am smart enough to know that I will lose $3.25 per unit if I make this sale. Therefore, I must refuse your offer.

Required:

A. From the list of costs in the product cost report, which costs would be relevant to the decision to sell at the special price?

B. What will be the amount of the total relevant cost per unit in regard to this order?

C. What would be the differential income (loss) to Big Bend Machinery if this order were accepted?

D. Are there any nonfinancial factors that you would consider in making this decision?