Olivia's Ovens produces convection ovens sold to kitchen supply stores for $400 each. The plant capacity...
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Accounting
Olivia's Ovens produces convection ovens sold to kitchen supply stores for $400 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
$120.00
$4,800,000
Direct labor
$80.00
$3,200,000
Manufacturing support
$100.00
$4,000,000
Selling and administrative
$40.00
$1,600,000
Total costs
$340.00
$13,600,000
Fixed manufacturing support costs are $2,500,000, and fixed selling and administrative costs are $1,000,000.
A new client proposes buying 10,000 units at $350 each, with bulk packaging reducing variable selling and administrative costs by 40%.
Required: Determine whether Olivia's Ovens should accept this special order. Conduct a differential cost analysis to justify your decision.
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