Problem 5 (10 Points)

Lorraine manufactures a single product with the following full unit costs for 3,000 units:

Direct materials	$80
Direct labor	40
Manufacturing overhead (40% variable)	120
Selling expenses (60% variable)	40
Administrative expenses (10% variable)	20
Total per unit	$300

A company recently approached Lorraine with a special order to purchase 500 units for $300. Lorraine currently sells the models to dealers for $550. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order.

Required:

a. Ignoring the special order, determine Lorraines profit on production and sales of 3,200 units. Ignore taxes in these analyses.

b. Should Lorraine accept the special order if its goal is to maximize short-run profits? Determine the impact on profit of accepting the order.

c. Determine the minimum price Lorraine would want, to increase before tax profits by $80,000 on the special order.

d. When making a special order decision, what non-quantitative (qualitative) aspects of the decision should Lorraine consider?

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