Special-Order Decision Rianne Company produces a light fixture with the followin

Question

Special-Order Decision

Rianne Company produces a light fixture with the following unit cost:

The production capacity is 300,000 units per year. Because of a depressed housing market, the company expects to produce only 180,000 fixtures for the coming year. The company also has fixed selling costs totaling $500,000 per year and variable selling costs of $1 per unit sold. The fixtures normally sell for $12 each.

At the beginning of the year, a customer from a geographic region outside the area normally served by the company offered to buy 100,000 fixtures for $7 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any variable selling costs.

Required:

1. Conceptual Connection: Based on a quantitative (numerical) analysis, should the company accept the order?

Direct materials $2 Direct labor 1 Variable overhead 3 Fixed overhead 2    Unit cost $8 the quantitative analysis is ? the special order. in favor of

Explanation / Answer

Relevant cost for fulfiling the special order of 100,000 fixtures is the variable cost to be incurred by Rianne Company beacuse the company does not have to forego its current sales of 180,000 fixtures. Total fixtures to be produced is within its annual capacity of 300,000 fixtures.

Accordingly, the company should accept the special order.

Direct Material 2.00 Direct Labour 1.00 Variable Overhead 3.00 Variable Selling Cost -   Total Cost per fixture 6.00 Selling Price per fixture 7.00 Net Gain per fixture 1.00 Total Gain for 100,000 Fixture 1,00,000

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