It has been three years since Jan Dodge purchased land and a building and began her company, Neu Fruit Bars Ltd., in Neustadt, Ontario. The company produces only one product: a chocolate bar made with locally grown fruits such as raspberries, strawberries, currents, elderberries, and other seasonal harvests. The production plant is capable of producing 10,000 chocolate bars a month, if run at full capacity.

Jan has been able to convince almost all of the small retailers in Grey County to sell the chocolate bars in their variety stores, resulting in sales of almost 7,000 bars a month. She has also been making an effort to expand into nearby Huron County. Earlier this month, September, Jan was very excited to receive an order from a retailer who wanted to place a one-time order for 3,000 bars in October for a two-week festival during that month. The retailer hoped to feature the chocolate bar at a booth they were planning to operate at the festival. This is a huge order for Neu Fruit Bars Ltd. However, Jan was not convinced that it would benefit the business, given that the price offered by the customer was considerably lower than the normal selling price.

Jan was very concerned about making the correct decision about this special order and decided to ask Jill, her cost accountant, for an opinion on whether this order should be accepted at a price of $0.75 per bar compared to the usual $1.10 per bar for all other customers. Jill was excited to be consulted for input on this important decision and wanted to demonstrate the power of management accounting concepts to Jan. Jill looked at the cost data and prepared the following report.

Variable costs:

Cocoa $ 0.35

Milk 0.08

Sugar 0.05

Berries 0.14

Total variable costs $ 0.62

Annual fixed costs:

Production salary $ 14,400

Property taxes production building 2,400

Depreciation production equipment 12,000

Insurance (production assets) 4,800

Total fixed costs $ 33,600

Jill presented the above information to Jan, explaining that the cost behaviour of the various cost inputs must be considered. That is, variable costs increase with each bar sold. Therefore, for each of the 3,000 bars produced as part of the special order the company must buy cocoa, milk, sugar, and berries. On the other hand, Jill insisted that the special order would not cause fixed costs to change. Specifically, the salaries of the production staff (the bars can be produced with the hours of a normal production shift), property taxes, depreciation, and insurance would be unchanged regardless of whether the order is accepted.

Jan thanked Jill for the information and explanations, but felt even more confused about whether this order was a good deal for the company.

Required:

Do you agree with the explanations provided by Jill? What advice would you provide Jan about the special order? (11)

b) Are there other nonfinancial considerations that Jan should weigh in her decision? (4)