Question

1. Otibi Company produces light furniture at a unit cost of $60 which includes direct materials $20, direct labour $12, variable overhead $18 and fixed overhead $10. Despite Otobi’s production capacity of 100,000 per year, it has a plan to produce only 60,000 units in the coming year. The company has fixed selling costs of $200,000 per year. A piece of furniture is usually sold at a price of $80.

At the beginning of the year, a customer from a geographic region outside the area normally served by the company offered to buy 20,000 pieces of furniture for $52 each. The customer offered to pay all transportation costs of $5,000. Since there would be no sales commission, this order would not have any variable selling costs.   

Required:

1. Based on quantitative analysis, explain whether Otobi will have sufficient benefit to accept the order?
2. What qualitative factors might affect the decision, assuming no other orders are expected beyond the regular business and the special order.

Answer 1