San Jose Sunglasses sell for about $151 per pair. Suppose that the company incurs the following average costs per pair: (Click the icon to view the cost information.) San Jose has enough idle capacity to accept a one-time-only special order from Colorado Shades for 17,000 pairs of sunglasses at $82 per pair. San Jose will not incur any variable selling expenses for the order. Read the requirements. Requirement 1. How would accepting the order affect San Jose's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should San Jose's managers consider in deciding whether to accept the order? Prepare the analysis to determine the effect on operating income. (Enter decreases to profits with a parentheses or minus sign.) Expected increase in revenues 17,000 sunglasses x D 82 1,394,000 Expected increase in expenses 17,000 sunglasses x L 61 1,037,000 Expected increase in operating income 357,000 In addition to the special order's effect on profits, what other (longer-term qualitative) factors should San Jose's managers consider in deciding whether to accept the order? O A. How will San Jose's competitors react? Will they retaliate by cutting their prices and starting a price war? OB. Will San Jose's other customers find out about the lower sale price San Jose offered to Colorado Shades? If so, will these other customers demand lower sale prices? OC. Will lowering the sale price tarnish San Jose's image as a high-quality brand? OD. All of the above OE. None of the above Requirement 2. San Jose's marketing manager, Peter Smith, argues against accepting the special order because the offer price of $82 is less than San Jose's $89 cost to make the sunglasses. Smith asks you, as one of San Jose's staff accountants, to explain whether his analysis is correct. What would you say? Costs that we will incur whether or not we fill the order are to our decision. This is why comparing the $82 price Colorado Shades offered us with our $89 total cost of making the When deciding whether to accept a special order, we should compare the sunglasses is irrelevant The additional revenues and the additional costs that we will incur to fill the special order are the Colorado Shades special order, we will incur only $ of additional cost per pair, which is per pair that Colorado Shades offered. Therefore, we should the special order to operating income. If we accept than the the company's $82 Requirement 2. San Jose's marketing manager, Peter Smith, argues against accepting the special order because the offer price of $82 is less than San Jose's $89 Co When deciding whether to accept a special order, we should compare the sunglasses is Costs The additional revenues and the additional costs that we will incur to fill the the Colorado Shades special order, we will incur only $ per pair that Colorado Shades offered. Therefore, we should operating income. revenues we will receive against the differential costs prior to filling the order. revenues we will receive against the differential costs we will incur to fill the order. revenues prior to filling the order against the extra costs we will incur to fill the order. Requirement 2. San Jose's marketing manager, Peter Smith, argues against accepting the special order because the offer price of $82 is less tha When deciding whether to accept a special order, we should compare the sunglasses is The additional correct the Colorado incorrect per pair that c operating income. $82 order, we will incur only $ offered. Therefore, we should If we accept than the the company's of additional cost per pair, which is the special order to hat we will incur to fill the special order are hly $ ve should the special order to If we accept than the $82 company's relevant. * Data Table Direct materials Direct labor Variable manufacturing overhead Variable selling expenses Fixed manufacturing overhead $ 89 Total cost * $2,400,000 Total fixed manufacturing overhead/96,000 Pairs of sunglasses
