Mohave Corp. makes several varieties of beach umbrellas and accessories. It has

Question

Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). The special-order umbrellas with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine.

Lost Mine has offered to buy 1,500 of the US umbrellas at a price of $11 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:

Compute the incremental profit (or loss) from accepting the special order.

Suppose that the special order had been to purchase 2,000 umbrellas for $9.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario.

Assume that Mohave is operating at full capacity. Calculate the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order.

Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). The special-order umbrellas with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine.

Lost Mine has offered to buy 1,500 of the US umbrellas at a price of $11 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:

Explanation / Answer

Actual cost of the umbrella=$13

Contribution from outside customers=$19-(5+2+3.5)=$19-$10.5=8.5$

contribution from lost mine=11-10.5=0.5$

As it has excess capacity incremental profit=1500*(0.5-2.50)= -3000

Fixed costs shall be incurred as a whole though the company accepts or not accepts

in case company accepts there would be a loss of $3000(750-3750)

in case company does not accept there woould be a loss of $3750(1500*2.50)

yes it is better to accept the order as his loss would decrease from $3750 to $3000

Suppose that the special order had been to purchase 2,000 umbrellas for $9.00 each

contribution = 2000*(9-10.5)=-3000

loss= 2000*(9-13)= -8000

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