Question

1. Washington Corp. (WC) has the capacity to produce 20,000 fax machines per year. WC currently produces and sells 14,000 units per year. The fax machines normally sell for $200 each. Modem Products has offered to buy 4,000 fax machines from WC for $100 each. Unit-level costs associated with manufacturing the fax machines are $50 each for direct labor, $30 each for unit direct materials, and $10 each for unit variable overhead cost. Allocated product-level cost are $12 each and allocated facility-sustaining costs are $16.2 each. Should WC accept the special offer?

   	a.	Reject, profit will decrease by 10,000 if WC accepted this special order.
   	b.	Accept, profit will increase by 440,000 if WC accepted this special order.
   	c.	Reject, profit will decrease by 40,000 if WC accepted this special order.
   	d.	Accept, profit will increase by 40,000 if WC accepted this special order.

Answer 1

Ans: Accept, profit will increase by 40,000 if WC accepted this special order
Capacity of Production (in units)		20,000
current production (in units)		14,000
Rate ($)		200
		if accepted the offer		if not accepted the offer
Purchase offer (Units)		4,000		0
Normal sales (Units)		14,000		14,000.00
Revenue ($)	14000*200+4000*100	32,00,000	14000*200	28,00,000
Cost of sales :
Labour	50		50.00
Material Cost	30		30.00
Variable Overhead	10		10.00
Variable Cost per unit	90		90
Total Variable Cost in $ (A)	90*18,000 units	16,20,000	90*14,000 units	12,60,000.00
Fixed cost
Allocated product level cost	12		12
Allocated facility sustaining costs	16.2		16.2
Fixed Cost Per unit	28.2		28.2
Total Fixed Cost in $ (B)	28.2* 20,000 units	5,64,000	28.2* 20,000 units	5,64,000
Total Cost (A+B)		21,84,000		18,24,000.00
Profit if accepted the offer ( Revenue - Total Cost)		10,16,000		9,76,000.00
Profit increased by ( in $)	10,16,000-9,76,000	40,000