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Scott Company has an annual capacity of 18,000 units. Budgeted operating results for 2004 are as follows: (15 marks)

Revenues (16,000 units @ $60) $960,000
Variable costs:
Manufacturing $384,000
Selling  128,000  512,000
Contribution margin $448,000

Fixed costs:
Manufacturing $160,000
Selling and administrative  120,000  280,000
Operating income $168,000

A foreign wholesaler wants to buy 1,000 units at a price of $40 per unit. All fixed costs would remain within the relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular orders.

Required:

a. Determine the effect on operating income if the company produces the special order.
b. Should the company produce the special order?
c. Determine operating income if the customer had wanted a special order of 3,000 units and the company produced the special order.
d. Should the company produce the 3,000-unit special order?
e. Discuss any nonquantitative factors the company might want to consider when making the decision.

 

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