Chapter 8, Problem 8.20AE

Analyze special order decision (Learning Objective 3)

Perreth Industries has an annual plant capacity of 70,000 units; current production is 55,000 units per year. At the current production volume, the variable cost per unit is $30.00 and the fixed cost per unit is $4.10. The normal selling price of Perreth’s product is $45.00 per unit. Perreth has been asked by Rummell Company to fill a special order for 10,000 units of the product at a special sales price of $25.00 per unit. Rummell is located in a foreign country where Perreth does not currently operate. Rummell will market the units in its country under its own brand name, so the special order is not expected to have any effect on Perreth’s regular sales.

Requirements

1. 1. How would accepting the special order impact Perreth’s operating income? Should Perreth accept the special order?
2. 2. How would your analysis change if the special order sales price were to be $40.00 per unit and Perreth would have to pay an attorney a fee of $15,000 to make sure it is complying with export laws and regulations relating to the special order?