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Q1) Maui Juda Sunglasses sell for about %154 per pair.  Assume company acquires average costs per pair which is given below:

 

Direct Materials

$38

Direct labor

10

Variable manufacturing overhead

8

Variable marketing expenses

2

Fixed manufacturing overhead

16*

Total costs

74

 

$2,200,000 total fixed manufacturing overhead/137,500 pairs of sunglasses

 

Maui Juda has sufficient idle capacity to accept one-time-only special order from LA Glasses for 19,000 pairs of sunglasses at $59 per pair.  Maui Juda won't acquire any variable marketing expenses for order.

 

Required:

 

a) How would accept order affect Maui Juda's operating income? Additionally to special order's effect, what other (long-term, qualitative) factors must Maui Juda's managers consider in deciding whether to accept order?

 

b) Maui Juda's marketing manager, Jim Revo, argues against accepting special order as the offer price of $59 is less than Maui Juda's $74 cost to make sunglasses.  Revo asks you, as one of Maui Juda's staff accountants, to describe whether his analysis is right.

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  • Category:- Accounting Basics
  • Reference No.:- M916870

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