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Special order

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.

Solution Summary

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