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Watermark Corporation manufactures faucets. Several weeks ago, the firm received a special-order inquiry from Vale, Inc. Vale desires to market a faucet similar to Watermark's

Watermark Corporation manufactures faucets. Several weeks ago, the firm received a special-order inquiry from Vale, Inc. Vale desires to market a faucet similar to Watermark's model no. 55 and has offered to purchase 3,200 units. The following data are available:

  • Cost data for Watermark's model no. 55 faucet: direct materials, $48; direct labor, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour).
  • The normal selling price of model no. 55 is $180; however, Vale has offered Watermark only $124 because of the large quantity it is willing to purchase.
  • Vale requires a modification of the design that will allow a $7 reduction in direct-material cost.
  • Watermark's production supervisor notes that the company will incur $8,444 in additional set-up costs and will have to purchase a $22,700 special device to manufacture these units. The device will be discarded once the special order is completed.
  • Total manufacturing overhead costs are applied to production based on direct labor hours. Total budgeted overhead is $840,000. This figure is based on budgeted yearly fixed overhead of $624,000, a budgeted variable overhead of $216,000, and a budgeted activity level of 24,000 direct labor hours.
  • Watermark will allocate $11,000 of existing fixed administrative costs to the order as "...part of the cost of doing business."

Required:

  1. One of Watermark's staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Watermark currently has excess capacity? Show calculations to determine the incremental profit or loss on this special order to support your answer.

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