Oliver's Ornaments manufactures decorative ornaments sold to gift shops for $12 each. The plant capacity is...
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Accounting
Oliver's Ornaments manufactures 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 as follows:
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 Oliver's Ornaments should accept the special order. Prepare a relevant cost analysis to support your decision.
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