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Question: Bradley Inc. has the capacity to make 100,000 windows. Bradley is curr

ID: 2595072 • Letter: Q

Question

Question: Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 100% cap...

Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 100% capacity. The windows usually sell for $20.00 each. The costs for each window follow:

Direct Materials 5.00

Direct Labor 3.00

Variable factory oh 2.00

Fixed factory oh 4.00

Total $14.00

The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:

1. Reject the order because the company will lose $20,000 on the order

2. Accept the offer because the company will realize $40,000 in additional contribution margin

3. Accept the offer because the company will realize $20,000 in additional contribution margin

4. Reject the offer because it currently does not have enough capacity to accept the order.

Explanation / Answer

Solution: Option(1) is correct.

Bradley should reject the order because there will incur a loss if he accepts the order.

cost for each window = $14

Total no. of units the army offered to buy = 10,000 units

Therefore, total cost of 10,000 windows = 10000*14 = $140,000

The offered price to buy each window = $12

Total sale revenue = 10000*12 = $120,000

Therefore, Net income = 120000-140000 = -$20,000

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