Rachel's Rugs produces area rugs sold to home decor stores for $200 each. The plant capacity...
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Rachel's Rugs produces area rugs sold to home decor stores for $200 each. The plant capacity is 50,000 units annually, but normal volume is 40,000 units. Unit and total costs at normal volume are:
Type of Cost | Unit Costs | Total Costs |
Direct materials | $50.00 | $2,000,000 |
Direct labor | $30.00 | $1,200,000 |
Manufacturing support | $60.00 | $2,400,000 |
Selling and administrative | $20.00 | $800,000 |
Total costs | $160.00 | $6,400,000 |
Fixed manufacturing support costs are $2,000,000, and fixed selling and administrative costs are $1,000,000.
A prospective customer offers to purchase 15,000 units at $180 each, with bulk packaging reducing variable selling and administrative costs by 30%.
Required: Determine whether Rachel's Rugs should accept this special order. Conduct a break-even analysis to justify your recommendation.
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