Special order decision

Jamala Company produces air conditioners and has a production capacity of 300 000 units per year. Because of a downturn in the market, the company expects to produce only 180 000 air conditioners for the next year. The company has the following unit cost:

Description $

Direct materials 300

Direct labour 200

Variable overhead 180

Fixed overhead 120

Unit cost $800

The company also has fixed selling costs totalling $500 000 per year and variable selling costs of $50 per unit sold. The air conditioners normally sell for $1 200 each.

At the beginning of the year, a customer from a geographic region outside the area which Jamala normally serves offered to buy 100 000 air conditioners for $700 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any variable selling costs.

Required:

(a)

Based on a quantitative analysis, should Jamala accept the order? Discuss which costs are irrelevant.

(b)

What qualitative factors might affect the decision? Assume that no other orders are expected beyond the regular business and the special order.