Harcourt Marketing (HM) has the capacity to produce 10,000 fax machines per year
ID: 2504449 • Letter: H
Question
Harcourt Marketing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing each fax machine are $15 for direct labor and $40 for direct materials. Product-level and facility-sustaining costs are $50,000 and $65,000, respectively.
1. What is HM's current profit (net income)?
Provide answer and show work
2. How much would profit increase (decrease) if HM accepted this special order?
Provide answer and show work
3. Should HM accept the special offer?
a. Yes, unequivocally
b. No, because it would decrease company profit
c. Yes, if qualitative factors are favorable.
d. No, because GAAP requires all costs to be included in the product
Explanation / Answer
1. What is HM's current profit (net income)?
HM's current profit = Revenue - Cost = 7000*100 - 7000*(15+40) - 50000-65000= $200000
2. How much would profit increase (decrease) if HM accepted this special order?
HM's new profit = 7000*100 +2000*60 - (7000+2000)*(15+40) - 50000-65000= $210000
profit increase = $210000- $200000 = $10000
3. Should HM accept the special offer?
c. Yes, if qualitative factors are favorable.
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