Special Order Decision: Operating with Idle Capacity. The following monthly financial data are for Sport Socks, Inc., a maker of socks for runners. Sport Socks makes and sells 40,000 pairs each month to regular customers.
Sport Socks received an offer from a large sporting goods store to purchase 15,000 socks next month for $0.90 per pair. Sport Socks can produce up to 60,000 pairs of socks a month, so the special order would not affect regular customer sales. Variable costs per pair will remain at $0.70. This special order will cause fixed costs to increase by $6,000 for next month. Required:
a. Using the differential analysis format presented in , determine whether Sport Socks would be better off rejecting the special order (Alternative 1) or accepting the special order (Alternative 2).
b. Summarize the result of accepting the special order using the format presented in .