Please Explain

Issue #4 NuSkin manufactures several different styles of cosmetic bags as per of their regular product lines. Management estimates that during the first quarter of this year, the company will operate at about 80% of normal capacity. Two special orders have been received, and management is making a decision about whether to accept either or both orders. The first order is from Smart-Mart Department Stores. The manager would like to market a cosmetic case similar to one of NuSkin's current basic models. Smart-Mart wants its own label on the bags and is willing to pay $5.75 per case for 20,000 bags to be shipped by April 1. The cost data for NuSkin's case that is similar to the requested case follow: Selling price per unit $9.00 Cost per unit Raw materials $2.50 Direct labour (0.25 hr. * $12) 3.00 Overhead (0.25 machine hr. * $4) 1.00 Total cost per unit $6.50 According to the specifications supplied by Smart-Mart, the special order case requires less expensive raw materials. Therefore, the raw materials for the special order will cost $2.25 per case. Management believes that the rest of the costs, labour time, and machine time will remain the same as for NuSkin's case. The second order is from the Ultra-Beauty Company. Its managers want 8,000 bags for $7.50 per case. These cosmetic bags, to be marketed under the Ultra-Beauty label, would also need to be shipped by April 1. However, these bags are somewhat different from any bags currently manufactured by NuSkin. Following are the estimated unit costs: Cost per unit Raw materials $3.25 Direct labour (0.25 hr. * $12) 3.00 Overhead (0.5 machine hr. * $4) 2.00 Total cost per unit $8.25 In addition to these per-unit costs, NuSkin would incur $1,500 in setup costs and would need to purchase $2,500 in special equipment to manufacture these bags. Currently, NuSkin would have no other use for the equipment once this order was filled. NuSkin's capacity constraint is total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year, or 7,500 hours per month. Fixed manufacturing overhead costs are allocated to production on the basis of machine hours at $4.00 per hour and are budgeted at $360,000 per year. The machine only purpose is to produce cosmetic bags. NuSkin can work on the special orders throughout the entire first quarter, in addition to performing its normal production. NuSkin's managers do not expect any repeat sales to be generated from either special order. Which special orders, if any, should NuSkin accept? The CEO would like you to provide both quantitative and qualitative analysis. Part of your report should identify and explain the risk that affects NuSkin's decision