Rudolph Corporation is a toy manufacturer. Lights, Inc. has approached Rudolph, as the company would like to sell a toy reindeer that is similar to what Rudolph creates. Lights has offered to purchase 5,000 units. The following data is available:

The toy reindeer costs the following to manufacture: direct materials, $49; direct labor, $30 (2 hours at $15 per hour); and manufacturing overhead, $82 (2 hours at $41 per hour)

The normal selling price of the reindeer is $190, but Lights has only offered $110 because the company plans to order in large quantities.

Lights needs a slight modification to the product that would reduce the direct material cost by $3.

Rudolphs production manager has determined that the company will incur set-up costs of $15,000 and will need to purchase a new device costing $5,000 to manufacture the units. This device will be eliminated once the production for Lights is complete.

Manufacturing overhead costs are applied to production at $40 per direct labor hour. The budgeted fixed overhead is $640,000, and the planned level of activity is 25,000 direct labor hours.

Required: 1. A staff accountant has determined that Rudolph should reject the project because the company would lose money. Do you agree with the staff accountant (assuming Rudolph has excess capacity)? a. Create a schedule to show the amount of profit (loss) that the company would earn (lose) with the special order.

2. Write a memo to the staff accountant with the following information: a. Briefly describe the seven steps in the decision-making process. b. Defend the costs that you included in your schedule for 1. c. In general, note when you should accept or reject a special order and discuss why.

3. What would be the selling price, holding everything else constant, that would result in zero profit or loss?