The Max Company manufactures wiring tools.The company is currently producing wel

Question

The Max Company manufactures wiring tools.The company is currently producing well below its full capacity. The Beatson COMPANY has approached Max with an offer to buy 5,000 tools at $17.50 each. Max sells its tools wholesale for $18.50 each. The average cost per unit is $18.30, of which $2.70 is fixed costs.

a. If Max were to accept Beatson's offer, what would be the increase In Max's operating profits?

B. Assume that Max is operating at full capacity. If Max were to accept Beatson's offer, what would be the change in Max's operating profits?

Explanation / Answer

a) Yes, it would increase the profits by 5000 * ( 17.5 - ( 18.3 - 2.7 ) ) = 9,500

b) change in max profits = 5000 * ( 17.5 - 18.5 ) = -5,000

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