Sophia's Sofas produces high-end sofas sold to furniture stores for $600 each. The plant capacity is...
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Accounting
Sophia's Sofas produces high-end sofas sold to furniture stores for $600 each. The plant capacity is 50,000 units annually, but normal volume is 35,000 units. Unit and total costs at normal volume are:
Type of Cost | Unit Costs | Total Costs |
Direct materials | $200.00 | $7,000,000 |
Direct labor | $150.00 | $5,250,000 |
Manufacturing support | $100.00 | $3,500,000 |
Selling and administrative | $50.00 | $1,750,000 |
Total costs | $500.00 | $17,500,000 |
Fixed manufacturing support costs are $4,000,000, and fixed selling and administrative costs are $1,500,000.
A prospective customer offers to purchase 10,000 units at $500 each, with simplified packaging reducing variable selling and administrative costs by 30%.
Required: Determine whether Sophia's Sofas should accept this special order. Conduct a contribution margin analysis to justify your recommendation.
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