SPECIAL-ORDER DECISION, QUALITATIVE ASPECTS

Randy Stone, manager of Specialty Paper Products Company, was agonizing over an offer for an order requesting 5,000 calendars. Specialty Paper Products was operating at 70 percent of its capacity and could use the extra business; unfortunately, the order's offering price of $4.20 per calendar was below the cost to produce the calendars.

The controller, Louis Barns, was opposed to taking a loss on the deal. However, the personnel manager, Yatika Blaine, argued in favour of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help to maintain the company's community image. The full cost to produce a calendar follows:

Direct materials $1.15

Direct labour 2.00

Variable overhead 1.10

Fixed overhead 1.00

Total $5.25

Later that day, Louis and Yatika met over coffee. Louis sympathized with Yatika's concerns and suggested that the two of them rethink the special-order decision. He offered to determine relevant costs if Yatika would list the activities that would be affected by a layoff. Yatika eagerly agreed and came up with the following activities: an increase in the Employment Insurance rate from 1 percent to 2 percent of total payroll, notification costs to lay off approximately 20 employees, and increased costs of rehiring and retraining workers when the downturn was over. Louis determined that these activities would cost the following amounts:

Total payroll is $1,460,000 per year.

Layoff paperwork is $25 per laid-off employee.

Rehiring and retraining is $150 per new employee.

Required:

1. Assume that the company will accept the order only if it increases total profits. Should the company accept or reject the order? Provide supporting computations.

2. Consider the new information on activity costs associated with the layoff. Should the company accept or reject the order? Provide supporting computations.