Making special pricing decisionsNewtown Sunglasses sell for about $154 per pair. Suppose that the company incurs the following average costs per pair:Newtown has enough idle capacity to accept a one-time-only special order from Water Shades for 17,000 pairs of sunglasses at $80 per pair. Newtown will not incur any variable selling expenses for the order.RequirementsHow would accepting the order affect Newtown’s operating income? In addition to the special order’s effect on profits, what other (longer-term qualitative) factors should Newtown’s managers consider in deciding whether to accept the order?Newtown’s marketing manager, Peter Kyler, argues against accepting the special order because the offer price of $80 is less than Newtown’s $83 cost to make the sunglasses. Kyler asks you, as one of Newtown’s staff accountants, to explain whether his analysis is correct. What would you say? $ 3915Direct materialsDirect labor6.Variable manufacturing overheadVariable selling expenses20Fixed manufacturing overheadTotal cost$ 83* $2,050,000 Total fixed manufacturing overhead / 102,500 Pairs of sunglasses

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Answered: $ 39 15 Direct materials Direct labor…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Making special pricing decisions

Newtown Sunglasses sell for about $154 per pair. Suppose that the company incurs the following average costs per pair:

Newtown has enough idle capacity to accept a one-time-only special order from Water Shades for 17,000 pairs of sunglasses at $80 per pair. Newtown will not incur any variable selling expenses for the order.

Requirements

How would accepting the order affect Newtown’s operating income? In addition to the special order’s effect on profits, what other (longer-term qualitative) factors should Newtown’s managers consider in deciding whether to accept the order?
Newtown’s marketing manager, Peter Kyler, argues against accepting the special order because the offer price of $80 is less than Newtown’s $83 cost to make the sunglasses. Kyler asks you, as one of Newtown’s staff accountants, to explain whether his analysis is correct. What would you say?

$ 39
15
Direct materials
Direct labor
6.
Variable manufacturing overhead
Variable selling expenses
20
Fixed manufacturing overhead
Total cost
$ 83
* $2,050,000 Total fixed manufacturing overhead / 102,500 Pairs of sunglasses

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