Evaluating a Special Order

Flame Company manufactures gas grills and is considering expanding production. A distributor has asked the company to produce a special order of 8,000 grills to be sold overseas. The grills would be sold under a different brand name and would not influence Flame Company's current sales. The plant is currently producing 95,000 units per year. The company's maximum capacity is 100,000 units per year, so the company would have to reduce the production of units sold under its own brand name by 3,000 units if the special order is accepted. The company's income statement for the previous year is presented below:

Sales(95,000 units)$7,125,000

Costofgoodssold:

Direct materials$2,375,000

Direct labor1,900,000

Manufacturing overhead1,425,0005,700,000

Gross Profit1,425,000

Selling expenses575,000

Administrative expenses237,500812,500

Net income$ 612,500

The company's variable manufacturing overhead is $ 10 per unit and the variable selling expense is $5 per unit. The administrative expense is com0pletely fixed and would increase by $5,000 if the special order is accepted. There would be no variable selling expense associated with the special order, and variable manufacturing overhead per unit would remain constant.

The company's direct labor cost per unit for the special order would increase 20% while direct materials cost per unit for the special order would increase 10%. Fixed manufacturing overhead and fixed selling expense would not change.

Required:

If the distributor has offered to pay $65 per unit for the special order, should the company accept the offer? Justify your answer.