Chapter 23 18. Upshot Corporation produces a single product and has the capacity

Question

Chapter 23 18. Upshot Corporation produces a single product and has the capacity to produce 100,000 units per month. Costs to produce its current sales of 80,000 units follow. The regular selling price of the product is $100 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for $75 per unit. If the order is accepted, there will be no additional fixed manufacturing overhead and no additional fixed selling and administrative expenses. The customer is not in the company's regular selling territory, so there will be a $5 per unit shipping expense in addition to the regular variable selling and administrative expenses. Per Unit Costs at 80,000 Units $1,000,000 1,200,000 Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses $12.50$1,00 15.00 10.00 17.50 14.00 13.001 $82.00 800,000 1,400,000 1,120,000 1,040,000 $6,560,000 | Totals Determine whether or not management should accept or reject the offer.(7pts) (show calculations!!)

Explanation / Answer

Incremental profit from extra 20000 units

Unit selling price. 75 $

Variable costs

(12.5+15+10+5). (42.5)$

Contribution. 32.50$

Less: variable admin

Expenses. (14)

Profit per unit 18.5$

Incremental profit would be. = 18.5* 20000 = 3,70,000$

Therefore the management should take the order.

Non- financial Factors such as credibility of customer should be looked into if the sales is going to be at credit. Management should also consider the additional order eHich will flow to them because of this order due to mouth to mouth publicity in that area where the customer operates.

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