International Ltd. makes sport wear glasses. A domestic sporting goods chain recently submitted a order for 4000 sport wear glasses. International Ltd. was not operating at capacity and could use the extra business. Unfortunately the orders offering price of $17 persport wear glasses was below the cost to produce the glasses. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favour of accepting the order even though a loss would be incurred. It would avoid the problem of lay offs, and would help maintain the community image of the company.

The full cost to produce a sport wear glasses is presented below.

Direct Materials- $ 6.50

Direct Labour - $ 5

Variable Overhead - $ 3.25

Fixed Overhead - $ 2.50

Total - $ 17.50

No variable selling or administrative expenses would be associated with the order.

Required:

1) Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order ? Provide supported computations.

2) Consider the personnel manager concerns. Discuss the merits of accepting the order even if it decreases total profits?