Question

Stavos Company’s Screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen follows:

Variable cost per screen	$	117
Fixed cost per screen		30	*
Total cost per screen	$	147

*Based on a capacity of 750,000 screens per year.

Part of the Screen Division’s output is sold to outside manufacturers of HDTVs and part is sold to Stavos Company’s Quark Division, which produces an HDTV under its own name. The Screen Division charges $182 per screen for all sales.

The costs, revenue, and net operating income associated with the Quark Division’s HDTV are given below:

Selling price per unit			$	576
Variable cost per unit:
Cost of the screen	$	182
Variable cost of electronic parts		237
Total variable cost				419
Contribution margin				157
Fixed costs per unit				83	*
Net operating income per unit			$	74

*Based on a capacity of 180,000 units per year.

The Quark Division has an order from an overseas source for 5,000 HDTVs. The overseas source wants to pay only $403 per unit.

Required:

1. Assume the Quark Division has enough idle capacity to fill the 5,000-unit order. Is the division likely to accept the $403 price or to reject it?

2. Assume both the Screen Division and the Quark Division have idle capacity. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Division rejects the $403 price?

3. Assume the Quark Division has idle capacity but that the Screen Division is operating at capacity and could sell all of its screens to outside manufacturers. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Division accepts the $403 unit price.

Answer 1

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Part 1
Quark division probably will reject the order since offered price of $403
is lower than total variable cost of $419.
Part 2
Office Price		$           403
Less: Screen Division Variable Cost		$          -117
Less: Quark Division variable cost		$          -237
Potential profit forgone if rejected		$              49
Part 3
Office Price		$           403
Less: Screen Division- Revenue forgone		$          -182
Less: Quark Division variable cost		$          -237
Net Loss pEr unit (Disadvantage)		$            -16