Question

"S8-5 Special order decision (Learning Objective 3) Shilling Manufacturing produces and sells oil filters for $3.25 each. A retailer has offered to purchase 20,000 oil filters for $1.55 per filter. Of the total manufacturing cost per filter of $2.10, $1.30 is the variable manufacturing cost per filter. For this special order, Shilling would have to buy a special stamping machine that costs $8,000 to mark the customer’s logo on the special order oil filters. The machine would be scrapped when the special order is complete. This special order would use manufacturing capacity that would otherwise be idle. No variable nonmanufacturing costs would be incurred by the special order. Regular sales would not be affected by the special order. Would you recommend that Shilling accept the special order under these conditions?"

Answer 1

	Per unit	Total order (20000 units)
Revenue from special order	1.55	31000
Less variable expenses associated with the order
Variable manufacturing costs	1.30	26000
Contribution margin	0.25	5000
Fixed costs-Purchase of special stamping machine		8000
Increase (decrease) in operating income		(3000)
Shilling should not accept the special order because it will decrease operating income by $3000