Gibbs Corporation makes indoor gas fireplaces. A standard fireplace includes unit-level materials, labor, and overhead costs. In addition, the company incurs product-level engineering and advertising costs. The sales staff is paid a 5% commission on each fireplace sold. A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs' selling price. Which of the following costs would be relevant to this special order decision?

Question

Quizplus · Accepted Answer

The unit-level materials, labor, and overhead costs are relevant to the special order decision because they are direct costs of producing the fireplaces. The developer's request to buy at a lower price would affect the company's revenue and profit margin, making it necessary to consider the cost of producing the fireplaces. The sales commission is a period-level cost that would be incurred regardless of whether or not the special order is accepted. The product-level engineering and advertising costs are sunk costs that have already been incurred and would not be affected by the special order decision. Therefore, they are not relevant to this decision.

Gibbs Corporation Makes Indoor Gas Fireplaces