Chapter 8, Problem 63P

Special-Order Decision, Qualitative Aspects

Randy Stone, manager of Specialty Paper Products Company, was agonizing over an offer for an order requesting 5,000 boxes of calendars. Specialty Paper Products was operating at 70% of its capacity and could use the extra business. Unfortunately, the order’s offering price of $4.20 per box was below the cost to produce the calendars. The controller, Louis Barns, was opposed to taking a loss on the deal. However, the personnel manager, Yatika Blaine, argued in favor of accepting the order even though a loss would be incurred. It would avoid the problem of layoffs and would help to maintain the company’s community image. The full cost to produce a box of calendars follows:

Later that day, Louis and Yatika met over coffee. Louis sympathized with Yatikás concerns and suggested that the two of them rethink the special-order decision. He offered to determine relevant costs if Yatika would list the activities that would be affected by a layoff. Yatika eagerly agreed and came up with the following activities: an increase in the state unemployment insurance rate from 1% to 2% of total payroll, notification costs to lay off approximately 20 employees, and increased costs of rehiring and retraining workers when the downturn was over. Louis determined that these activities would cost the following amounts:

• Total payroll is $1,460,000 per year.
• Layoff paperwork is $25 per laid-off employee.
• Rehiring and retraining is $150 per new employee.

Required:

1. 1. CONCEPTUAL CONNECTION Assume that the company will accept the order only if it increases total profits (without taking the potential layoffs into consideration). Should the company accept or reject the order? Provide supporting computations.
2. 2. CONCEPTUAL CONNECTION Consider the new information on activity costs associated with the layoff. Should the company accept or reject the order? Provide supporting computations.