Newtown Sunglasses sell for about $157 per pair. Suppose that the company incurs the following average costs per pair: (Click the icon to view the cost information.) Newtown has enough idle capacity to accept a one-time-only special order from Colorado Shades for 25,000 pairs of sunglasses at $77 per pair. Newtown will not incur any variable selling expenses for the order. Read the requirements. Requirement 1. How would accepting the order affect Newtown's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Newtown's managers consider in deciding whether to accept the order? Prepare the analysis to determine the effect on operating income. (Enter decreases to profits with a parentheses or minus sign.) Expected increase in revenues 80 2,000,000 25000 sunglasses x sunglasses x Expected increase in expenses Expected in operating income In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Newtown's managers consider in deciding whether to accept the order? O A. Will Newtown's other customers find out about the lower sale price Newtown offered to Colorado Shades? If so, will these other customers demand lower sale prices? B. How will Newtown's competitors react? Will they retaliate by cutting their prices and starting a price war? O C. Will lowering the sale price tarnish Newtown's image as a high-quality brand? OD. All of the above O E. None of the above Requirement 2. Newtown's marketing manager, Peter Rouse, argues against accepting the special order because the offer price of $77 is less than Newtown's $83 cost to make the sunglasses. Rouse asks you, as one of Newtown's staff accountants, to explain whether his analysis is correct. What would you say? When deciding whether to accept a special order, we should compare the revenues we will receive against the differential costs we will incur to fill the order. Costs that we will incur whether or not we fill the order are relevant to our decision. This is why comparing the $77 price Colorado Shades offered us with our $83 total cost of making the sunglasses is incorrect If we accept The additional revenues and the additional costs that we will incur to fill the special order are relevant. the Colorado Shades special order, we will incur of additional cost per pair, which only $ per pair that Colorado Shades offered. Therefore, we should accept the special order to increase less than the $77 the company's operating income. Data Table Direct materials $ Direct labor Variable manufacturing overhead Variable selling expenses Fixed manufacturing overhead $ 83 Total cost * $2,200,000 Total fixed manufacturing overhead / 88,000 Pairs of sunglasses Print Print Done Done]
