QUESTION 3 Accept or Reject a Special Order Drip right Corporation manufactures faucets Several weeks ago, the company received a special order inquiry from MacDonald Incorporated MacDonald desires to market a faucet similar to Drip right's Model No 32 and has offered to purchase 3,000 units The following data are available Cost data for Drip right's Model No 32 faucet direct materials, $45 direct labour, $30 (2 hours at $15 per hour) and manufacturing overhead, $70 (2 hours at $35 per hour) The normal selling price of Model No 32 is $180 however, MacDonald has offered Drip right only $115 because of the large quantity it is willing to purchase MacDonald requires a design modification that will allow a $4 reduction in direct material cost Drip right's production supervisor notes that the company will incur $8,700 in additional set up costs and will have to purchase a $3,300 special device to manufacture these units The device will be discarded once the special order is completed 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 Drip right will allocate $5,000 of existing fixed administrative costs to the order as part of the cost of doing business Required One of Drip right's staff accountants wants to reject the special order because financially, it's a loser Do you agree with this conclusion if Drip right currently has excess capacity Show calculations to support your answer If Drip right currently has no excess capacity, should the order be rejected from a financial perspective Briefly explain Assume that Drip right currently has no excess capacity Would outsourcing be an option that Drip right could consider if management truly wanted to do business with MacDonald Briefly discuss, citing several key considerations for Drip right in your answer

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QUESTION 3 Accept or Reject a Special Order Drip-right Corporation manufactures faucets. Several weeks ago, the company received a special-order inquiry from MacDonald Incorporated. MacDonald

QUESTION 3

Accept or Reject a Special Order

Drip-right Corporation manufactures faucets. Several weeks ago, the company received a special-order inquiry from MacDonald Incorporated. MacDonald desires to market a faucet similar to Drip-right's Model No. 32 and has offered to purchase 3,000 units. The following data are available:

Cost data for Drip-right's Model No. 32 faucet: direct materials, $45; direct labour, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour).
The normal selling price of Model No. 32 is $180; however, MacDonald has offered Drip-right only $115 because of the large quantity it is willing to purchase.
MacDonald requires a design modification that will allow a $4 reduction in direct-material cost.
Drip-right's production supervisor notes that the company will incur $8,700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture these units. The device will be discarded once the special order is completed.
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.
Drip-right will allocate $5,000 of existing fixed administrative costs to the order as "part of the cost of doing business."

Required:

One of Drip-right's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Drip-right currently has excess capacity? Show calculations to support your answer.

If Drip-right currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain.

Assume that Drip-right currently has no excess capacity. Would outsourcing be an option that Drip-right could consider if management truly wanted to do business with MacDonald? Briefly discuss, citing several key considerations for Drip-right in your answer.