The product has variable manufacturing costs of $ 8.50 per unit and fixed manufa

Question

The product has variable manufacturing costs of $ 8.50 per unit and fixed manufacturing costs of $ 2.00per unit? (based on $ 200000 total fixed costs at current production of 100000?units). Therefore, total production cost is $ 10.50per unit. Thomas Company receives an offer from WesleyCompany to purchase 5000 units for $ 9.00each. Selling and administrative costs and future sales will not be affected by the? sale, and Thomas does not expect any additional fixed costs. Company makes a product that regularly sells for $ 12.50per unit. If Thomas Company has excess? capacity, should it accept the offer from Wesley ?? If Thomas Company has excess? capacity, should it accept the offer from Wesley ?? If Thomas Company has excess? capacity, should it accept the offer from Wesley ?? What is expected increase in revenue, variable manufacturing cost, increase/decrease in operating income?

Explanation / Answer

If Thomas company has excess capacity:

Thomas should accept the offer because operating income will increase by $2,500.

note:

fixed cost is not relevant for decision making here, since it is incurred irrespective of accepting or rejecting the order.

expected increase in revenue (5,000 units*$9) $45,000 increase in variable manufacturing cost (5,000 units *$8.50) $42,500 increase / (decrease) in operating income (45,000- 42,500) $2,500

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