Waterways mass-produces a special connector unit that it normally sells for $3.9
ID: 2497628 • Letter: W
Question
Waterways mass-produces a special connector unit that it normally sells for $3.90. It sells approximately 35,000 of these units each year. The variable costs for each unit are $2.30. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 15,000 of these units at $2.60 per unit. The production of these units is near full capacity at Waterways, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit.
An irrigation company has asked for a special order of 2,000 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.10 per unit.
Given the information above:
(a) What are the consequences of Waterways agreeing to provide the 15,000 units to the
Canadian company? Would this be a wise “special order” to accept?
(b) Should Waterways accept the special order from the irrigation company?
(c) What would be the consequences of accepting both special orders?
Explanation / Answer
Answer (a)
Answer -b
Answer (c)
Present Gross profit of the company Sale (unit) 35000 Sale price/unit 3.90 Sale amount 136500 Variable Cost '2.30*35000 80500 Gross Profit 56000 If Company accept Canadian Co. Order Present additional Sale (unit) 35000 15000 Sale price/unit 3.90 2.60 Sale amount 136500 39000 Variable Cost '2.30*35000 80500 Additional variable cost '2.60*15000 39000 Less Saving in Selling exp '0.20*15000 3000 Gross Profit 56000 3000 Total Gross profit of the company will be 56000+3000 = $ 59000. So company may be accept the proposal.Related Questions
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