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- Allen and McConnell, Inc. (A & M) manufacture a variety of consumer products which they sell to retailers around the country. One of their products, Pogo, normally wholesales for $180/unit. Pogo is manufactured in a separate facility that currently operates at 7,000 units/mo below capacity. Pogo costs $136/unit to manufacture: $36 of direct materials, $25 of direct labor, and $75 of overhead (applied at 300% of direct labor). The overhead pool is 80% fixed and 20% variable. A new customer, Enormous Mart, has approached A & M about purchasing a large quantity of Pogo: 8,000 units/mo for each of the next six months. Enormous Mart has offered to pay $110/unit. Because of a small design modification, A & M will incur $50,000 in one-time set up costs, which will result in a reduction of $4/unit in raw materials costs. Because the order is negotiated through headquarters, the normal 10% sales commission will not be paid.
Is the order profitable for A & M? Show your calculationsWhat other factors should A & M consider in deciding whether to accept the order?
