Swirl Incorporated designs and manufactures fashionable women’s clothing. For the coming year, the company has scheduled production of 50,000 silk skirts. Budgeted costs for this product are as follows:

 

Unit Costs

 

 

 

  (50,000 units) Total Variable manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . $40 $2,000,000 Variable selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 750,000 Fixed manufacturing costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 600,000 Fixed operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10      500,000 Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . $77 $3,850,000   Â

LO5

 

 

 

 

 

The management of Swirl is considering a special order from Discount Fashions for an additional 18,000 skirts. These skirts would carry the Discount Fashions label, rather than the Swirl label. In all other respects, they would be identical to the regular Swirl skirts.

Although Swirl regularly sells its skirts to retail stores at a price of $180 each, Discount Fash- ions has offered to pay only $55 per skirt. However, because no sales commissions would be involved with this special order, Swirl will incur variable selling expenses of only $5 per unit on these sales, rather than the $15 it normally incurs. Accepting the order would cause no change in the company’s fixed manufacturing costs or fixed operating costs. Swirl has enough plant capacity to produce 70,000 skirts per year.

 

Instructions

a.       Using incremental revenue and incremental costs, compute the expected effect of accepting this special order on Swirl’s operating income.

b.       Briefly discuss any other factors that you believe Swirl’s management should consider in deciding whether to accept the special order. Include nonfinancial as well as financial considerations.