Anchor Company manufactures several different styles of jewelry cases. Management estimates that during the third quarter of 19×6 the company…

Anchor Company manufactures several different styles of jewelry cases. Management estimates that during the third quarter of 19×6 the company will be operating at 80 percent of normal capacity. Because the company desires a higher utilization of plant capacity, the company will consider a special order.

Anchor has received special order inquires from two companies. The first order is from JCP Inc., which would like to market a jewelry case similar to one of Anchor’s cases. The JCP jewelry case would be marketed under JCP’s own label. JCP Inc. has offered Anchor $5.75 per jewelry case for 20,000 cases to be shipped by October 1, 19×6. The cost data for the Anchor jewelry case which would be similar to the specifications of the JCP special order are as follows:

According to the specifications provided by JCP Inc., the special order case requires less expensive raw materials. Consequently, the raw materials will only cost $2.25 per case. Management has estimated that the remaining costs, labor time, and machine time will be the same as the Anchor jewelry case.

The second special order was submitted by the Krage Co. for 7,500 jewelry cases at $7.50 per case. These jewelry cases, as with the JCP cases, would be marketed under the Krage label and have to be shipped by October 1, 19×6. However, the Krage jewelry case is different from any jewelry case in the Anchor line. The estimated per-unit costs of this case are as follows:

In addition, Anchor will incur $1,500 in additional setup costs and will have to purchase a $2,500 special device to manufacturer these cases; this device will be discarded once the special order is completed.

The Anchor manufacturing capabilities are limited to the total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year or 7,500 machine hours per month. The budgeted fixed overhead for 19X6 amounts to $ 216,000. All manufacturing overhead cost are applied to production on the basis of machine hours at $4.00 per hour.

Anchor will have the entire third quarter to work on the special orders. Management does not expect any repeat sales to be generated from either special order. Company practice precludes Anchor from subcontracting any portion of an order when special orders are not expected to generate repeat sales.

Required: Should Anchor Company accept either special order? Justify your answer and show your calculations.