Motor Corp. manufactures machine parts for boat engines. The CEO, James Hamilton, is considering an offer from a subcontractor who would provide 3,000 units of product AB100 for Hamilton at a price of $230,000. If Motor Corp. does not purchase these parts from the subcontractor it must produce them in-house with the following per-unit costs:

Direct materials

$

40

Direct labor

25

Variable overhead

15

Allocated fixed overhead

4

In addition to the above costs, if the company produces part AB100, it would incur incremental fixed overhead costs of approximately $10,000.

Required:

a)What would be the impact on short-term operating income if the company were to accept the offer from the subcontractor? Show calculations to support your answer. (10 marks)

b)What strategic factors/considerations are generally relevant to the special-order decision problem (i.e., whether a company should accept a one-time order from a customer with whom the company does not generally do business)? (10 marks)