Question

Special-Order Decision, Traditional Analysis, Qualitative Aspects

Feinan Sports, Inc., manufactures sporting equipment, including weight-lifting gloves. A national sporting goods chain recently submitted a special order for 4,000 pairs of weight-lifting gloves. Feinan Sports was not operating at capacity and could use the extra business. Unfortunately, the order’s offering price of $12.70 per pair was below the cost to produce them. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a pair of weight-lifting gloves is presented below.

Direct materials	$7.40
Direct labor	3.80
Variable overhead	1.60
Fixed overhead	3.10
Total	$15.90

No variable selling or administrative expenses would be associated with the order. Non-unit-level activity costs are a small percentage of total costs and are therefore not considered.

1. Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order?
Reject

Provide supporting computations. If required, round your answers to the nearest cent. Enter a loss as a negative amount.

Incremental revenue per pair	$
Incremental cost per pair
Incremental gain (loss) per pair	$

Total decrease  in income: $

2. Suppose that Feinan Sports has negotiated with the potential customer, and has determined that it can substitute cheaper materials, reducing direct materials cost by $0.80 per unit. In addition, the company’s engineers have found a way to reduce direct labor cost by $0.40 per unit. Should the company accept or reject the order?
Accept

Provide supporting computations. If required, round your answers to the nearest cent. Enter a loss as a negative amount.

Incremental revenue per pair	$
Incremental cost per pair
Incremental gain (loss) per pair	$

Total increase  in income: $

Answer 1

when the special order is received the relevant cost is only variable costs that is associated with the production (material+labor+variable overhead)

As the company is not operating at its full capacity , the regular sales will not be affected hence fixed overhead will remain constant and that's why it is irrelevant in decision making.

Incremental revenue per pair	$12.70
incremental cost per pair	$12.80	[$7.40+$3.80+$1.60]
incremental gain(loss) per pair	-$0.10	[12.70-12.80]
Total decrease in income	$400
Loss per pair*number of pairs		[0.10*4000]

(2)

Incremental revenue per pair	$12.70
Incremental cost per pair	$11.60	[$6.60+$3.40+1.60]
Incremental gain (loss) per pair	$1.1	[12.70-11.60]
Total increase in income	$4,400	[$1.10*4000]

incremental cost

material = $7.40-0.80 =$6.60

labor = 3.80-0.40 = $3.40