Autocar Company manufactures automobiles. The red car division sells its red car

Question

Autocar 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 $18,000. 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

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks It should not. See, total cost incurred for 6000 units, per unit = $12500+ $25000000/6000 = $16666.67 per unit. which greater than $16000 offered.

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