Question $7.$

Pea Ridge Corporation manufactures faucets. Several weeks ago, the company received a special$-$order inquiry from Galena, Incorporated.

Galena desires to market a faucet similar to Pea Ridge's model number $55$ and has offered to purchase $3,000$ units. The following data are

available:

Cost data for Pea Ridge's model number $55$ faucet: direct materials, $$45$; direct labor, $$30(2$ hours at $$15$ per hour$)$; and manufacturing

overhead, $$70(2$ hours at $$35$ per hour$).$

The normal selling price of model number $55$ is $$180$; however, Galena has offered Pea Ridge only $$115$ because of the large

willing to purchase.

Galena requires a design modification that will allow a $$4$ reduction in direct$-$material cost.

Pea Ridge'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 labor hour. This figure is based, in part, on budgeted

yearly fixed overhead of $$624,000$ and planned production activity of $24,000$ labor hours.

Pea Ridge will allocate $$5,000$ of existing fixed administrative costs to the order as "part of the cost of doing business."

Required:

A$.$ One of Pea Ridge's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if

Pea Ridge currently has excess capacity? Show calculations to support your answer.

B$.$ If Pea Ridge currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain.

C$.$ Assume that Pea Ridge currently has no excess capacity. Would outsourcing be an option that Pea Ridge could consider if management

truly wanted to do business with Galena? Briefly discuss, citing several key considerations for Pea Ridge in your answer.