Hilton Stenback Sunglasses sell for about $152 per pair. Suppose the company incurs the following average costs per pair: Direct materials. . . . . . . . . . . . . . . . . . . . $60 Direct labor. . . . . . . . . . . . . . . . . . . . . . . 12 Variable manufacturing overhead. . . . . . . 8 Variable marketing expenses. . . . . . . . . . 3 Fixed manufacturing overhead. . . . . . . . . 16* Total cost. . . . . . . . . . . . . . . . . . . . . . . . . $99 * $2,300,000 total fixed manufacturing overhead ÷ 143,750 pairs of sunglasses Stenback has enough idle capacity to accept a one-time-only special order from Rolling Glasses for 22,000 pairs of sunglasses at $89 per pair. Hilton Stenback will not incur any variable marketing expenses for the order. 1. How would accepting the order affect Hilton Stenback's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Hilton Stenback's managers consider in deciding whether to accept the order? 2. Hilton Stenback's marketing manager, Jim Revo, argues against accepting the special order because the offer price of $89 is less than Hilton Stenback's $99 cost to make the sunglasses. Revo asks you, as one of Hilton Stenback's staff accountants, to explain whether his analysis is correct.

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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Hilton Stenback Sunglasses sell for about $152 per pair. Suppose the company incurs the following average costs per pair:

Direct materials. . . . . . . . . . . . . . . . . . . . $60

Direct labor. . . . . . . . . . . . . . . . . . . . . . . 12

Variable manufacturing overhead. . . . . . . 8

Variable marketing expenses. . . . . . . . . . 3

Fixed manufacturing overhead. . . . . . . . . 16*

Total cost. . . . . . . . . . . . . . . . . . . . . . . . . $99

* $2,300,000 total fixed manufacturing overhead ÷ 143,750 pairs of sunglasses

Stenback has enough idle capacity to accept a one-time-only special order from Rolling Glasses for 22,000 pairs of sunglasses at $89 per pair. Hilton Stenback will not incur any variable marketing expenses for the order.

1. How would accepting the order affect Hilton Stenback's operating income? In addition to the special order's effect on profits, what other (longer-term qualitative) factors should Hilton Stenback's managers consider in deciding whether to accept the order?
2. Hilton Stenback's marketing manager, Jim Revo, argues against accepting the special order because the offer price of $89 is less than Hilton Stenback's $99 cost to make the sunglasses. Revo asks you, as one of Hilton Stenback's staff accountants, to explain whether his analysis is correct.

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