Novacar Company manufactures automobiles. The red car division sells its red car
ID: 2525460 • Letter: N
Question
Novacar Company manufactures automobiles. The red car division sells its red cars for $25,000 each to the general public. The red cars have manufacturing costs of $12,500 each for variable and $5,000 each for fixed costs. The division's total fixed manufacturing costs are $25,000,000 at the normal volume of 5,000 units. The blue car division has been unable to meet the demand for its cars this year. It has offered to buy 1,000 cars from the red car division at the full cost of $13,000. The red car division has excess capacity and the 1,000 units can be produced without interfering with the outside sales of 5,000. The 6,000 volume is within the division's relevant operating range. Explain whether the red car division should accept the offer. Support your decision showing all calculations.
Explanation / Answer
By accepting the offer from Blue Car Division, The Red Car Division will enjoy additional contribution of ($500 X 1,000) $500,000.
They should except the offer.
Offered Price $13,000 Less : Direct Cost ($12,500) Contribution Per Unit $500Related Questions
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