Terrain Tents makes backpacking tents. It has the capacity to produce 10,000 tents per year and currently is producing and selling 7,000 tents. Normal selling price for a tent is $450. Unit-level costs are $90 for direct materials, $220 for direct labor, and $15 for other manufacturing costs. Facility-level costs of $110 are allocated to each tent. Terrain has received a special order for 2,500 tents at $320 each.Required: Should Terrain accept the special order? Support your answer with appropriate computations.
What will be an ideal response?
| Differential revenues (2,500 × $320) | $ 800,000 |
| Avoidable costs: | ? |
| Unit-level materials (2,500 × $90) | 225,000 |
| Unit-level labor (2,500 × $220) | 550,000 |
| Other Unit-level cost (2,500 × $15) | 37,500 |
| Contribution to income | (12,500) |
The special order would cause income to decrease by $12,500; based on this information, it should not be accepted.
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