SPECIAL ORDER DECISION

Pinto Manufacturing. has a capacity of producing 300,000 units a year and sells them at $28 a unit. Fixed overhead is budgeted at $1,200,000 while fixed administration costs are estimated to be $450,000.

At present Pinto is selling 250,000 units. A foreign distributor has made a one-time offer to purchase 40,000 units at $20 a unit. The customer will pay all freight costs and no commissions will be paid on this order, so variable selling costs will be reduced by 40%.

The sales manager has collected the following per-unit data on Pintos operating costs:

Per Unit

Direct Materials $ 3.00

Direct labor 7.50

Variable overhead 6.00

Variable selling 3.50

Fixed overhead 4.00

Fixed administration 1.50

Total $ 25.50

REQUIRED:

1. Determine if the order, as stated, should be accepted or rejected. How much better off will Pinto be if they follow your recommendation?

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2. Whats the real cost of this special order to Pinto?

3. What is the minimum acceptable price which could be accepted?

4. NOW imagine that Pinto was operating at capacity, and that this order would displace other orders. How would this change your answer? Why? What would be the new minimum acceptable price?