Question

Louboutin Shoes, an exclusive Italian shoe manufacturer, sells their handcrafted women’s fashion originals for about $300 per pair. Suppose the company incurs the following average costs per pair of shoes:

Direct Materials $80

Direct Labor 28

Variable Manufacturing Overhead 22

Variable Marketing Expenses 4

Fixed Manufacturing Overhead 32*

Total Costs (per pair) $166

* $4,000,000 Total Fixed Mfg. O/H

125,000 Pairs of Shoes

Louboutin has enough idle capacity to accept a one-time only custom special order from a specialty department store in New York and the New Jersey area for 20,000 pairs of a special design ladies summer shoe at $142 per pair. Louboutin will not incur any additional variable marketing expenses for the special order.

a. How would this special order affect Louboutin’s operating income?

b. In addition to the special order’s effect on current profits, what other longer-term qualitative factors should Louboutin’s management consider before any decision to accept the special order opportunity?

Answer 1

Part a)

The affect of special order on Louboutin’s operating income is calculated as below:

Revenue from Special Order (20,000*142)		2,840,000
Less Variable Costs
Direct Materials (20,000*80)	1,600,000
Direct Labor (20,000*28)	560,000
Variable Manufacturing Overhead (20,000*22)	440,000
Total Variable Expense		2,600,000
Incremental Operating Income from Special Order		$240,000

Louboutin’s operating income will increase by $240,000 as a result of this special order.

______

Part b)

The longer-term qualitative factors should Louboutin’s management consider before any decision to accept the special order opportunity are given as below:

1) Louboutin’s management should take into account the possibility of repeat orders from the new customer. While, Louboutin may be able to fulfill this order, it may not be possible to accept and execute such orders in the future.

2) The average price of Louboutin’s share is $300 per share. Lowering prices by more than half ($142) for the special order can affect its brand value.

3) Louboutin’s management should also take into account the response of other regular customers if they become aware of the price at which the special order was executed. This can have a serious have affect on its future orders and customer loyalty.