Right Size Corporation manufactures faucets. Several weeks ago, the company received a special-order inquiry from Bates Inc. Bates desires to market a faucet similar to Right Size’s model no. 85 and has offered to purchase 3,000 units. The following data are available:
• Cost data for Right Size’s model no. 85 faucet: direct materials – $45; direct labour – $30 (2 hours at $15 per hour); and manufacturing overhead – $70 (2 hours at $35 per hour).
• The normal selling price of model no. 85 is $180; however, Bates has offered Right Size only $115 because of the large quantity it is willing to purchase.
• Bates requires a design modification that will allow a $4 reduction in direct-material cost.
• Right Size’s production supervisor notes that the company will incur $8,700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture these units. This device will be discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production at the rate of $35 per labour hour. This figure is based, in part, on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labour hours.
• Right Size will allocate $5,000 of existing fixed administrative costs to the order as “¼ part of the cost of doing business.”
A. Should the special order be rejected if Right Size has excess capacity? Show calculations to support your answer.
B. If Right Size currently has no excess capacity, should the order be rejected from a financial perspective?
My question- Could this question be solved using process costing? If so how is it done
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