Special Orders: Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, whichis a busy month:
|
Custom Dresses |
Standard Dresses |
Total |
| Number of dresses |
10 |
20 |
30 |
| Sales revenue |
$50,000 |
$25,000 |
$75,000 |
| Materials |
$10,000 |
$8,000 |
$18,000 |
| Labor |
20,000 |
9,000 |
29,000 |
| Machine depreciation |
600 |
300 |
900 |
| Rent |
4,200 |
2,800 |
7,000 |
| Heat and light |
1,000 |
600 |
1,600 |
| Other production costs |
|
|
2,800 |
| Marketing and administration |
|
|
7,700 |
| Total costs |
|
|
$67,000 |
| Operating profit |
|
|
$8,000 |
Ms. Nili already hasorders for the 10 custom dresses re?ected in the March forecastedincome statement. The depreciation charges are for machines used in therespective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so theseare variable costs. In March, cutting and sewing machines are expected to operate for 900 hours, ofwhich 600 hours will be used to make custom dresses. The rent is for the building space, which hasbeen leased for several years at $7,000 per month. The rent, heat, and light are allocated to theproduct lines based on the amount of poor space occupied.
A valued customer, whoisaweddingconsultant, has asked Ms. Nili foraspecial favor. This customer has aclient whowants toget married in early April. Ms.Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to10. Ms. Nili would lose permanently the opportunity tomake up the lost production of standard dresses because she has noun used capacity for the foresee able future.
The customer is willing to pay $25,000 for the special order. Materials and labor for the order will cost $6,000 and $10,000, respectively. The special order wouldrequire 140 hours of machinetime. Ms. Nili's company would save 150 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.
Required:
Should Ms. Nili take the order? Explain your answer.