Liberty Bicycles manufactures 3,500 bicycles each month. Variable manufacturing

Question

Liberty Bicycles manufactures 3,500 bicycles each month. Variable manufacturing costs are $45 per unit, while total fixed manufacturing costs are $52,500. Liberty normally sells its bicycles directly to retailers for $160 each. Liberty just received an offer from a new retailer that wants to purchase 1,200 bicycles at $150 each. In this scenario, Liberty should reject the offer ?

A : only if the firm does not have adequate manufacturing capacity.

B : only if the firm cannot reduce its total fixed costs by $18,000.

C : unless it can reduce its variable costs by $10 per unit.

D : unless the retailer is willing to pay $160 per bicycle.

Explanation / Answer

Liberty Bicycles All Amounts in $ Normal Business Profits Sales 560000 Less : Variable Costs 157500 Less : Fixed Costs 52500 210000 for 3,500 bicycles, the amount is $ 15 per bicycle Net Income 350000 If the special order is accepted Sales 180000 Less : Variable Costs 54000 Less : Fixed Costs @ $ 15 per bicycle 18000 72000 Net Income from additional order 108000 Hence, Liberty Bicycles should only reject the offer, if it does not have adequate manufacturing capacity, since if the order is processed, the Company stands to make an additional gain of $ 108,000.

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