(L.OBJ. 2) Making special order and pricing decisions [20—25 min] Maui Smith Sunglasses...

(L.OBJ. 2) Making special order and pricing decisions [20—25 min]

Maui Smith Sunglasses sell for about $150 per pair. Suppose that the company incurs the following average costs per pair:

Maui Smith has enough idle capacity to accept a one-time-only special order from Montana Glasses for 18,000 pairs of sunglasses at $70 per pair. Maui Smith will not incur any variable marketing expenses for the order.

Requirements

1. How would accepting the order affect Maui Smith’s operating income? In addition to the special order’s effect on profits, what other (longer-term qualitative) factors should Maui Smith’s managers consider in deciding whether to accept the order?

2. Maui Smith’s marketing manager, Jim Revo, argues against accepting the special order because the offer price of $70 is less than Maui Smith’s $78 cost to make the sunglasses. Revo asks you, as one of Maui Smith’s staff accountants, to explain whether his analysis is correct.