Accept this special order
1) Special order decision. Kirby Company manufacturers leather briefcases sold to wholesalers for $37.95. The plant capacity for manufacturing this product is 750,000 units annually, but normal volume is 500,000 units. The unit and total costs at normal volume follow:
Type of cost Unit cost Total cost
Direct materials $9.80 $4,900,000
Direct labor 4.50 2,250,000
Manufacturing support 12.00 6,000,000
Selling and administrative 6.70 3,350,000
Total costs $33.00 $16,500,000
Manufacturing support and selling and administrative costs include both variable and fixed costs; fixed manufacturing support costs for the current year are budgeted at $4,500,00, and fixed selling and administrative costs are $2,100,000.
The company has been approached by a prospective customer who has offered to purchase 100,000 briefcases at $25 each. The customer wants the product packaged in large cartons rather than the normal individual containers and will pick them up in its own trucks. Accordingly, the variable selling and administrative costs will be lower by 60% for this order.
Determine whether Kirby Company should accept this special order.