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Nathan's Notebooks manufactures leather-bound notebooks sold to bookstores for $25 each. The plant capacity is 1,000,000...

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Accounting

Nathan's Notebooks manufactures leather-bound notebooks sold to bookstores for $25 each. The plant capacity is 1,000,000 units annually, but normal volume is 750,000 units. The unit and total costs at normal volume are:

  • Direct materials: $6.00 per unit; Total: $4,500,000
  • Direct labor: $4.00 per unit; Total: $3,000,000
  • Manufacturing support: $5.00 per unit; Total: $3,750,000
  • Selling and administrative: $3.50 per unit; Total: $2,625,000
  • Total costs: $18.50 per unit; Total: $13,875,000

Fixed costs for manufacturing support are $2,500,000, and fixed selling and administrative costs are $1,000,000.

A new client proposes buying 100,000 units at $20 each, with bulk packaging lowering variable selling and administrative costs by 35%.

Required: Determine whether Nathan's Notebooks should accept this special order. Prepare a contribution margin analysis to support your recommendation.

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