Relevant-cost approach to pricing decisions, special order. The following financial data apply

| March 31, 2017

Question
Relevant-cost approach to pricing decisions, special order. The following financial data apply to the DVD production plant of the Dill Company for October 2011:

Budgeted Manufacturing Cost per DVD Pack

Direct materials

$1.60

Direct manufacturing labor

0.90

Variable manufacturing overhead

0.70

Fixed manufacturing overhead

1.00

Total manufacturing cost

$4.20

Variable manufacturing overhead varies with the number of DVD packs produced. Fixed manufacturing overhead of $1 per pack is based on budgeted fixed manufacturing overhead of $150,000 per month and budgeted production of 150,000 packs per month. The Dill Company sells each pack for $5. Marketing costs have two components:

Variable marketing costs (sales commissions) of 5% of revenues

Fixed monthly costs of $65,000

During October 2011, Lyn Randell, a Dill Company salesperson, asked the president for permission to sell 1,000 packs at $4.00 per pack to a customer not in Dill’s normal marketing channels. The president refused this special order because the selling price was below the total budgeted manufacturing cost.

1. What would have been the effect on monthly operating income of accepting the special order?

2. Comment on the president’s “below manufacturing costs” reasoning for rejecting the special order.

3. What other factors should the president consider before accepting or rejecting the special order?

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