Negan Sports Inc. produces high quality handcrafted wooden baseball bats used by many major league players. Lucille Corp. is looking to purchase bats to use in its corporate marketing campaign and has offered to purchase 3,000 bats from Negan Sports' customised range. The typical cost of one of the bats is as follows:

Direct material

$37.00

Direct labour: 2 hours at $15.00

30.00

Total manufacturing overhead:

2 hours at $35.00

70.00

Total

$137.00

The normal selling price of one of the bats is $180, however Lucille Corp. has offered Negan Sports $115 because of the large quantity it is willing to purchase.

Lucille Corp requires a gold embossed logo on the bats that will increase direct materials costs by $4. Negan Sports will incur an additional $8,700 in set ups costs and will need to purchase a special device for the embossing at a cost of $3,300. This device will no longer be needed once the special order is complete.

Total manufacturing overhead costs are applied to production at the rate of $35 per labour hour. This figure is based, in part, on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labour hours. Negan Sports manager believes they should allocate $5,000 of existing fixed administrative costs to the order as part of the cost of doing business.

Question:

Negan Sports' manager thinks they should reject the special order because financially its a loser. Do you agree with this conclusion assuming Negan Sports has excess capacity? Explain and show all calculations supporting your answer.

Overheard a fellow student in your class say, the whole subject of differential or incremental costs is easy; variable costs are the only costs that are relevant to making special order decision. Do you agree? Explain