Olivia's Ornaments produces decorative ornaments sold to gift shops for $12 each. The plant capacity is...
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Accounting
Olivia's Ornaments produces decorative ornaments sold to gift shops for $12 each. The plant capacity is 1,000,000 units annually, but normal volume is 750,000 units. Unit and total costs at normal volume are:
Type of Cost | Unit Costs | Total Costs |
Direct materials | $3.00 | $2,250,000 |
Direct labor | $2.00 | $1,500,000 |
Manufacturing support | $3.00 | $2,250,000 |
Selling and administrative | $1.50 | $1,125,000 |
Total costs | $9.50 | $7,125,000 |
Fixed manufacturing support costs are $2,000,000, and fixed selling and administrative costs are $1,000,000.
A prospective customer offers to purchase 150,000 units at $10 each, with bulk packaging reducing variable selling and administrative costs by 40%.
Required: Assess whether Olivia's Ornaments should accept the special order. Prepare a relevant cost analysis to support your decision.
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