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Fairy Products Inc. (FPI) produces the Clearwater Fairy filter, which sells for $65 each. At capacity, the company can produce 45,000 filters per year. The
Fairy Products Inc. (FPI) produces the Clearwater Fairy filter, which sells for $65 each. At capacity, the company can produce 45,000 filters per year. The costs of producing and selling 45,000 filters are as follows: Total costs Cost per filter $28 Direct materials $1,260,000 6 270,000 3 135,000 Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling Fixed selling 6 270,000 4 180,000 3 135,000 Total unit costs $50 $2,250,000 FPL is currently producing and selling 40,000 filters per year. At this level of production and sales, its fixed costs are the same as given in the table above. Required: s. a. A new customer wants to place a one-time special order for 4,500 filters.PPI has not done any business with this customer in the past. Due to the large volume of the special order, the customer has requested a special price of $45 each. PPI will only incur $1 variable selling costs for this special order. Quantitatively, should PPI accept this one-time special order? Calculate the impact on operating income of accepting the special order. Show your calculation (5 marks) b. Now assume that PPl is currently operating at full capacity (ie. Producing and selling 45,000 filters per year to its regular customers). Based on the same special order information provided in a), on financial considerations alone, should PPI accept this one-time special order? Calculate the impact on operating income of accepting the order. Show your (4 marks) calculations. c. What are two qualitative, non-financial, considerations relating to this special order? (2 marks)
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