Expansion of activity capacity for setups, inspection, and machining must be done in steps. For setups, each step provides an additional 20 hours of setup activity and costs $3,000. For inspection, activity capacity is expanded by 2,000 hours per year, and the cost is $20,000 per year (the salary for an additional inspector). Machine capacity can be leased for a year at a rate of $40 per machine hour. Machine capacity must be acquired, however, in steps of 1,500 machine hours.

Does the order require any change in capacity for setups, packing, or machining?

Ehrling can find no other cost-saving measures for this special order. Why might the company decide to accept it even if it shows a loss?

Ehrling, Inc., manufactures metal racks for hanging clothing in retail stores. Ehrling was approached by the CEO of Carly's Corner, a regional nonprofit food bank, with an offer to buy 350 heavy-duty metal racks for storing canned goods and dry food products. While racks normally sell for $245 each, Carly's Corner offered $75 per rack. The CEO explained that the number of families they served had grown significantly over the past two years, and that the charity needed additional storage for the donated food items. Since Ehrling is operating at 80 percent of capacity, and Ehrling employees have "adopted" Carly's Corner as their annual charity, the company wants to make the special order work. Ehrling's controller looked into the cost of the storage racks using the following information from the activity-based accounting system: Activity Rate* Activity Driver Unused Capacity Quantity Demanded* Fixed Variable Direct materials Number of racks 0 350 $82 Direct labor Direct labor hours 0 525 - 15 Setups Setup hours 60 1 $150 5 Inspection Inspection hours 800 20 10 5 Machining Machine hours 6,000 175 40 3