• against the (extra costs we will incur to fill the order, extra fixed costs we

Question

• against the (extra costs we will incur to fill the order, extra fixed costs we will incur to fill the order, total costs of making the sunglasses)
• fill the order are (irrelevant, relevant)
• the sunglasses is (correct, misleading)

Stella McKnight Sunglasses sell for about $145 per pair. Suppose the company incurs the following average costs per pair: (Click the icon to view the cost information.) Stella McKnight has enough idle capacity to accept a one-time-only special order from NYC Glasses for 21,000 pairs of sunglasses at $91 per pair. Stella McKnight will not incur any variable marketing expenses for the order.

Explanation / Answer

Part 1:

Accepting the order will increase the operating income of the concern as there is no incremental costs associated with the order and even there is savings in not incurring the variable marketing costs which is adjusted with the price.

Since there is idle capacity, it is beneficial to accept the order which will help in absorbing the fixed costs which will anyways be incurred if capacity is not utilized.

Here is the table for calculating the incremental income by accepting the order

Part 2:

D All of the above.

Accepting the order will have send signals in the market and hence competitors will be lowering the prices hence in order to cope up with the market, Stella McKnight will also be forced to lower the price unless the special order is not leakaged in the market.

This will also impact the quality image of the company

Part 3

1) against the extra costs we will incur to fill the order (variable costs only)

2) fill the order are irrlevant

3) the sunglasses is misleading

21000 per unit Total Order Selling price for special order $91.00 $19,11,000 Less Direct Materials $60.00 $12,60,000 Direct Labor $12.00 $2,52,000 Variable Manufacturing overheads $11.00 $2,31,000 Total Variable costs associated with the order $83.00 $17,43,000 Contribution Margin $8.00 $1,68,000 Less: Additional Fixed Expenses associated with the order $0.00 $0 Increase in operating income with the special order $8.00 $1,68,000

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