Question

Special-Order Decision, Traditional Analysis, Qualitative Aspects

Feinan Sports, Inc., manufactures sporting equipment, including weight-lifting gloves. A national sporting goods chain recently submitted a special order for 5,000 pairs of weight-lifting gloves. Feinan Sports was not operating at capacity and could use the extra business. Unfortunately, the order’s offering price of $12.70 per pair was below the cost to produce them. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a pair of weight-lifting gloves is presented below.

Direct materials   $7.40
Direct labor   3.80
Variable overhead   1.60
Fixed overhead   3.10
Total   $15.90
No variable selling or administrative expenses would be associated with the order. Non-unit-level activity costs are a small percentage of total costs and are therefore not considered.

1. Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order?

Provide supporting computations. If required, round your answers to the nearest cent. Enter a loss as a negative amount.

Incremental revenue per pair   $fill in the blank 2
Incremental cost per pair   fill in the blank 3
Incremental gain (loss) per pair   $fill in the blank 4
Total

in income: $fill in the blank 6
2. Suppose that Feinan Sports has negotiated with the potential customer, and has determined that it can substitute cheaper materials, reducing direct materials cost by $0.80 per unit. In addition, the company’s engineers have found a way to reduce direct labor cost by $0.40 per unit. Should the company accept or reject the order?

Provide supporting computations. If required, round your answers to the nearest cent. Enter a loss as a negative amount.

Incremental revenue per pair   $fill in the blank 8
Incremental cost per pair   fill in the blank 9
Incremental gain (loss) per pair   $fill in the blank 10
Total

in income: $fill in the blank 12

Answer 1

1	Incremental Revenue per Pair	12.7
	Incremental Cost per Pair	12.8
	Incremental Gain / ( Loss ) per Pair	-0.1
	Total	-500.0
*	Incremental Cost per Pair
	Direct Material per Pair	7.4
	Direct Labor per Pair	3.8
	Variable Overhead per Pair	1.6
	Incremental Cost per Pair	12.8
2	Incremental Revenue per Pair	12.7
	Incremental Cost per Pair	11.6
	Incremental Gain / ( Loss ) per Pair	1.1
	Total	5,500.0
*	Incremental Cost per Pair
	Direct Material per Pair	6.6	=7.4-0.8
	Direct Labor per Pair	3.4	=3.8-0.4
	Variable Overhead per Pair	1.6
	Incremental Cost per Pair	11.6
	Thank You!
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