Special-Order Decision, Alternatives, Relevant Costs

Redwood Elegance Company, manufactures wooden coffee tables for sale to specialty furniture stores. Currently, the company is operating at 80 percent of capacity. A chain of furniture outlet stores has offered to buy 28,000 units of Redwoods ornate rustic tables as long as the table can be customized with the outlet chain's logo. While the normal selling price is $6.40 per table, the chain has offered just $3.20 per table. Redwood can accommodate the special order without affecting current sales. Unit cost information is as follows:

Direct materials	$1.50
Direct labor	0.32
Variable overhead	0.07
Fixed overhead	2.05
Total cost per table	$3.94

Fixed overhead is $441,000 per year and will not be affected by the special order. Normally, there is a commission of 7 percent of price; this will not be paid on the special order since the outlet chain is dealing directly with the company. The special order will require additional fixed costs of $14,300 for the design and setup of the machinery to engrave the outlet chain's logo on each table.

Required:

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

Accept the special orderReject the special orderAccept the special order

The operating income would increase by $fill in the blank 2.

2. What if Redwood Elegance Company was operating at capacity and accepting the special order would require rejecting an equivalent number of tables sold to existing customers? Which alternative would be better?

Regular salesSpecial order