Islander Woods (IW) manufactures sets of wooden train sets. It operates in New York and sells most of its production to local retailers. Islander Woods currently produces and sells 45,000 sets of trains a year but has the capacity to produce a maximum of 50,000. It is early in the year and Islander Woods has received a request for a special order from a Brooklyn retailer who needs 8,000 sets of trains to sell at Fun Toys Inc. For consistency, this retailer requires the full order to be filled by a single supplier and is willing to pay $18 per set of trains.

Islander Woods income statement from the previous year is as follows:

Sales $900,000

Cost of goods sold

Direct materials $270,000

Direct labour 225,000

Manufacturing overhead 210,000 705,000

Gross Profit $195,000

Operating Expenses

Selling expenses $125,000

Administrative expenses 20,000 145,000

Net Income $ 50,000

Islander Woods variable selling expense is $2 per set of trains. The administrative expense is fixed but will increase by $2,000 if the special order is accepted. There will be no variable selling expense associated with this special order, and the variable manufacturing overhead per set of trains will remain constant. Fixed manufacturing overhead is $75,000 per year.

Due to unique specification of the order, Islander Woods direct labour cost per sets of trains for the special order will increase by 5% and its direct material costs per set of trains for the special order will increase by 10%. Fixed manufacturing overhead and fixed selling expenses will not change.

REQUIRED:

1. Calculate the net benefit or cost of this special order to Islander Woods.

2. Should this special order be accepted? (1 mark)

Include both quantitative (11 marks) and qualitative (3 marks) factors in your analysis.