Korte Company is currently producing 16,000 units per month, which is 80% of its production capacity. Variable manufacturing costs are currently $8.00 per unit. Fixed manufacturing costs are $56,000 per month. Korte pays a 9% sales commission to its sales people, has $30,000 in fixed administrative expenses per month, and is averaging $320,000 in sales per month.
A special order received from a foreign company would enable Korte Company to operate at 100% capacity. The foreign company offered to pay 75% of Korte’s current selling price per unit. If the order is accepted, Korte will have to spend an extra $2.00 per unit to package the product for overseas shipping. Also, Korte Company would need to lease a new stamping machine to imprint the foreign company’s logo on the product, at a monthly cost of $2,500.The special order would require a sales commission of $3,500.
(a) Compute the number of units involved in the special order and the foreign company’s offered price per unit.
(b) What is the manufacturing cost of producing one unit of Korte’s product for regular customers?
(c) Prepare an incremental analysis of the special order. Should management accept the order?
(d) What is the lowest price that Korte could accept for the special order to earn net income of $1.20 per unit?
(e) What nonfinancial factors should management consider in making its decision?