Newtown Sunglasses sell for about \(154 per pair. Suppose that the company incurs the following average costs per pair:
Direct materials \)39
Direct labor 15
Variable manufacturing overhead 6
Variable selling expenses 3
Fixed manufacturing overhead 20*
Total cost \(83
* \)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 \(80 per pair. Newtown will not incur any variable selling expenses for the order.
Requirements
1. How would accepting the order affect Newtownโs operating income? In addition to the special orderโs effect on profits, what other (longer-term qualitative) factors should Newtownโs managers consider in deciding whether to accept the order?
2. Newtownโs marketing manager, Peter Kyler, argues against accepting the special order because the offer price of \)80 is less than Newtownโs $83 cost to make the sunglasses. Kyler asks you, as one of Newtownโs staff accountants, to explain whether his analysis is correct. What would you say?