Question

Special-Order Decision, Alternatives, Relevant Costs

Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 85 percent of capacity. A chain of drugstores has offered to buy 32,000 boxes of Sequoia's blue-bordered thank-you notes as long as the box can be customized with the drugstore chain's logo. While the normal selling price is $6.10 per box, the chain has offered just $3.00 per box. Sequoia can accommodate the special order without affecting current sales.

Unit cost information for a box of thank-you notes follows:

Direct materials$1.95

Direct labor 0.31

Variable overhead 0.08

Fixed overhead 2.10

Total cost per box$4.44

Fixed overhead is $440,000 per year and will not be affected by the special order. Normally, there is a commission of 6 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $13,900 for the design and setup of the machinery to stamp the drugstore chain's logo on each box.

Required:

1.Which alternative is more cost effective and by how much?

The operating income would increase by $.

2.What ifSequoia Paper Products was operating at capacity and accepting the special order would require rejecting an equivalent number of boxes sold to existing customers? Which alternative would be better?