Lispell Co A What Costs Are Relevant to This Decision?
B

question 56

Essay

Lispell Co.manufactures in-line skates that sell for $128 a pair.The company is currently operating at capacity,2,000 pairs.A special order from a foreign distributor for 400 pairs of skates at $120 a pair has just been received.In order to accept this order,Lispell Co.would have to give up 400 pairs of its regular sales.However,there would be no sales commission incurred on the order.Shown below are the current costs of operation:
$\begin{array}{ll}\text { Direct materials } & \$ 48 \\\text { Direct labor } & 12 \\\text { Variable overhead } & 4 \\\text { Fixed overhead } & 5(\$ 10,000 \div\text { 2,000 pairs) }\\\text { Variable selling and administrative } & 8 \text { (sales commissions) } \\\text { Fixed selling and administrative } & 4(\$ 8,000\div\text { 2,000 pairs) } \end{array}$
a. What costs are relevant to this decision?
b. Provide an incremental analysis to be used in determining whether or not the order should be accepted.
c. Are there any qualitative considerations that need to be addressed? Explain.

---

Definitions:

Real Interest Rate

The real interest rate adjusts the nominal interest rate to remove the effects of inflation, reflecting the true cost of borrowing or the real yield on savings.

Future Consumption

Refers to the use or purchase of goods and services at a future date, an important concept in economics related to saving and investment decisions.

Current Consumption

The total value of all goods and services consumed by households and individuals in the present time period.

Present Value

Today's value of future money or cash flow sequences, calculated using a certain rate of return.