Sun Surf Fun manufactures quality beach towels at its highly automated plant. The plant has a production capacity of 50,000 towels each month. Currently, monthly production is 40,000 towels. Retail department stores account for all existing sales. Expected results for the coming month (August) are shown below. (These amounts are predictions based on past costs.) We assume all costs can be classified as either fixed or variable with respect to a single cost driver (units of output). As a result of a strike at its existing towel supplier, Arora, a luxury hotel chain, has offered to buy 7,000 towels from Sun Surf Fun in August at $11 per towel. Fixed manufacturing costs are based on the 50,000-towel production capacity. That is, fixed manufacturing costs relate to the production capacity available and not the actual capacity used.

Sun Surf Fun Expected Results for August

Part 1: Should Sun Surf Fun accept Aroras offer? Justify using relevant costs and revenue figures. Ensure you justify why each cost figure is either relevant or not relevant to the given decision. (5 marks)

Part 2: What possible long-run or strategic implication could result from Sun Surf Fun accepting this special order? (4 marks)

Please show all calculations

Total 40.000 Units Sold $800,000 Revenues Cost of Goods Sold (manufacturing costs Variable Man. Costs Fixed Man. Costs 300,000 180,000 480,000 Total COGS Marketing Costs Variable Marketing Costs Fixed Marketing Costs 200,000 80.000 280,000 760,000 $40,000 Total Marketing Costs Full Costs of the Product erating Income