Tine Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the company logo woven in the middle, to be priced at $30 each. Normally, Tine would charge $60 per carpet for this type of order. Tine figures that yarn and backing will cost $12 per carpet, variable overhead (machining, electricity) is $5 per carpet, direct labour is $10 per carpet, and one setup will be required at $800 per setup. The setup charge costs are 100% labour. Currently, the workers needed to set up and make the carpets are working at Tine. Their wages will be paid whether or not the special order is accepted. Tine's policy is to avoid layoffs to the extent possible.
-Refer to the Figure.Which of the following is NOT relevant to the special-order decision?
A)the cost of yarn and backing
B)the direct labour cost
C)the machining and electricity cost
D)the $30 price

Question

Quizplus · Accepted Answer

The direct labour cost is not relevant to the special-order decision because the workers needed to set up and make the carpets are already working at Tine, and their wages will be paid whether or not the special order is accepted. This means that the direct labour cost is a sunk cost in the context of this decision.

Tine Company Makes Carpets