Wool Incorporated

Wool Incorporated manufactures clothing from wool. Planning for next year, Wool Inc. has

consulted you to provide your recommendation on various business decisions. Use your

knowledge of relevant costs for decision making to provide a recommendation for each of the 4

business decisions.

Decision 1

For the coming year, the company has scheduled production of 50,000 wool scarves. Budgeted

costs for this product are as follows.

Unit Costs Total

(50,000 units)

Variable manufacturing costs $40 $2,000,000

Variable selling expenses 15 750,000

Fixed manufacturing costs 12 600,000

Fixed operating expenses 10 500,000

Total costs and expenses $77 $3,850,000

The management of Wool Inc. is considering a special order from WalMart for an additional

18,000 scarves. These scarves would have smaller tassels. In all other respects, they would be

identical to the regular scarves manufactured.

Although Wool Inc. regularly sells its scarves to retail stores at a price of $180 each, WalMart

has offered to pay only $55 per scarf. However, because no sales commissions would be

involved with this special order, Wool Inc. will incur variable selling expenses of only $5 per unit

on these sales, rather than the $15 it normally incurs. Accepting the order would cause no

change in the company's fixed manufacturing costs or fixed operating costs. Wool Inc. has

enough plant capacity to produce 70,000 scarves per year.

Required:

a. Perform a quantitative analysis to determine the impact on monthly profits if Wool

Inc. accepts the order. Should Wool Inc. accept the special order from WalMart?

b. Briefly discuss any other factors that you believe Wool Inc.'s management should

consider in deciding whether to accept the special order.