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    Special order

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    Rust Inc. manufactures a variety of desks for retail sale. The desks are normally distributed through several wholesalers. Energen Inc., a mid-size retailer, has offered to purchase 60,000 custom desks over the next three months, to be sold under the retailer's house brand. Energen offers to pay $190/unit, which is much less than Rust Inc's normal wholesale price of $280. Changes to the design would reduce the cost of direct materials by $8/unit. In order to commit to the order, Rust Inc. would need to purchase equipment valued at $40,000, which could be sold for $22,000 after three months. The current cost to produce the desk is $216/unit: direct materials $61, direct labor, $35, and overhead $120. Overhead is 25% variable and 75% fixed. Over the next three months, Rust's budgeted production without the Energen order is 70% of the plant machine capacity of 50,000 units per month.
    Is it in Rust's best interest to accept the Energen desk order? Please show calculations.

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    Solution Summary

    The solution explains how to decide whether to accept or reject a special order.