Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 45

Special Order Duvernoy Industries produces high-quality automobile seat covers. Its success in the industry is due to its quality, although all of its customers, the automakers, are very cost conscious and negotiate for price cuts on all large orders. Noting that the auto supply business is becoming increasingly competitive, Duvernoy is looking for a way to meet the challenge. It is negotiating with Chen, Inc., a large mail-order auto parts and accessories retailer, to purchase a large order of seat covers. Much of Duvernoy’s business is seasonal and cyclical, fluctuating with the varying demands of the large automakers. Duvernoy would like to keep its plants busy throughout the year by reducing these seasonal and cyclical fluctuations. Keeping the flow of product moving through the plants at a steady level is helpful in keeping costs down; extra overtime and machine setup and repair costs are incurred when production levels fluctuate. Chen has agreed to a large order but only at a price of $30 per set. The special order can be produced in one batch with available capacity. Duvernoy prepared these data:

Next month’s operating information without the
special order (per unit, for 10,000 units, made
in 10 batches of 1,000 each)
Sales price	$80
Per unit costs
Variable manufacturing costs	20
Variable marketing costs	8
Fixed manufacturing costs	40
Fixed marketing costs	3
Special order information
Sales	2,000 units
Sales price per unit	$30

No variable marketing costs are associated with this order, but Marc Jones, the firm’s president, has spent $6,000 during the past three months trying to get Chen to purchase the special order.

Required

1. How much will the special order change Duvernoy Industries’ total operating income?

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2. How might the special order fit into Duvernoy’s competitive situation?

Step 1 of 3

Fixed costs are costs which does not changes with change in level of production. Variable costs are costs which does changes with change in level of production.