Special-Order Decision, Alternatives, Relevant Costs

Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 90 percent of capacity. A chain of drugstores has offered to buy 32,000 boxes of Sequoias blue-bordered thank-you notes as long as the box can be customized with the drugstore chains logo. While the normal selling price is $5.30 per box, the chain has offered just $2.90 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows:

Direct materials	$1.90
Direct labor	0.33
Variable overhead	0.08
Fixed overhead	2.15
Total cost per box	$4.46

Fixed overhead is $390,000 per year and will not be affected by the special order. Normally, there is a commission of 9 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $15,900 for the design and setup of the machinery to stamp the drugstore chains logo on each box.

Required:

1. Which alternative is more cost effective and by how much? Accept the special order

The operating income would increase by $.