6. Fidel Health Products Company is entertaining an offer from a foreign customer to produce a
special variant of its popular J3 product. J3 usually sells for $22, and the product was recently
justified at a cost of $18. Regular J3 will certainly be produced, as there is sufficient demand and
plenty of excess capacity. The customer is willing to pay only $15 for each unit. Management at
Fidel wants to reject the offer, but you have prepared the following analysis:
Justification Cost ($18)
Direct Materials $3
Direct Labor 3
Variable Overhead 2
Fixed Selling * $10,000
Fixed Production ** $20,000
Variable Selling 3
* The fixed selling costs relate to a sales office set up especially for J3.
** The fixed production costs come from a foreman's salary. If J3 is not produced, this employee would
not be needed. The fixed costs were unitized into the $18 based on expected volume, but are not
unitized in your presentation.
If the offer is accepted, none of the regular selling process would be undertaken (nor
would any of the variable cost be incurred). A special $2 export fee (per unit) would
be charged, however. Fidel would also need to rent a special machine to customize
the special units. Rent would be $26,000. The customer expects to order 10,000 units.
a> Should Fidel accept the offer? Why or why not?
b> What other factors might one consider? Comment on these factors.
