Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 90 percent of capacity. A chain of drugstores has offered to buy 27,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized with the drugstore chain’s logo. While the normal selling price is $5.90 per box, the chain has offered just $3.40 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows: Direct materials $1.90 Direct labor 0.35 Variable overhead 0.08 Fixed overhead 2.20 Total cost per box $4.53
Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 90 percent of capacity. A chain of drugstores has offered to buy 27,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized with the drugstore chain’s logo. While the normal selling price is $5.90 per box, the chain has offered just $3.40 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows:
| Direct materials | $1.90 |
| Direct labor | 0.35 |
| Variable overhead | 0.08 |
| Fixed overhead | 2.20 |
| Total cost per box | $4.53 |
Fixed overhead is $428,000 per year and will not be affected by the special order. Normally, there is a commission of 5 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $13,500 for the design and setup of the machinery to stamp the drugstore chain’s logo on each box.
Required:
1. Which alternative is more cost effective and by how much?
The operating income would increase by $fill in the blank.
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