Company Should Accept a Special Order

1. Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. HM currently leases its excess capacity for a rental fee of $12,000. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-level costs are $50,000 and $65,000, respectively. Based on this information (ignore qualitative characteristics)

HM should reject the offer because accepting it will reduce profitability by $2,000.

HM should accept the offer because accepting it will contribute $10,000 to profit.

HM should reject the offer because accepting it will reduce profitability by $10,000.

HM should accept the offer because accepting it will contribute $12,000 to profit.

2. A company should accept a special order if:

additional revenue is greater than relevant costs.

the avoidable cost of making the products is less than the sunk cost.

the company is operating at full capacity.

qualitative features are unfavorable.