25-11 Making special pricing decisions Learning Objective 2 evtown Sunglasses se

Question

25-11 Making special pricing decisions Learning Objective 2 evtown Sunglasses sell for about $154 per pair. Suppose that the company incurs the following average costs per pair: 1 $340,000 Direct materials Direct labor Variable manufacturing overhead Variable selling expenses Fixed manufacturing overhead Total cost 39 15 20* 5 83 $2,050,000 Total fixed manufacturing overhead / 102,500 Pairs of sunglasses Newtown has enough idle capacity to accept a one-time-only special order from Water Shades for 17,000 pairs of sunglasses at $80 per pair. Newtown will not incur any variable selling expenses for the order. Requirements 1. How would accepting the order affect Newtown's operating income? In s effect on profits, what other (longer-term addition to the special order' qualitative) factors should Newtown's managers consider in deciding whether to accept the order? Newtown's marketing manager, Peter Kyler, argues against accepting the special order because the offer price of $80 is less than Newtown's $83 cost to make the sunglasses. Kyler asks you, as one of Newtown's staff accountants, to explain whether his analysis is correct. What would you say? 2.

Explanation / Answer

Req 1. Incremental revevnue: Sales revenue (17000 pairs @80) 1360000 Less: Incremental cost Material (17000 pairs @39) 663000 Labour (17000 pairs@15) 255000 Variable mfg OH (17000 pairs @6) 102000 Net increase in income 340,000 Req 2: The analysis to be shown in Accountant, the relevant cost of buying: Buying price 80 Less: Incrementa cost Material 39 Labour 15 Overheads 6 Contribution per unit 20 Hence, the order must be executed.

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