Reference no: EM132607307
Question - You are the accountant for Mr Brown's Business. Mr Brown makes and sells widgets to local farmers produced in a rented warehouse (warehouse rental costs are $50,000 per year). Currently Mr Brown employs Mr Green to look after the whole operation and pays him a salary of $100,000 per year. Currently widgets are the only product line Mr Brown manufactures.
Currently:
Production and sales information for the year are as follows.
Maximum production capacity of the warehouse: 25,000 units
Current production capacity: 20,000 units
Selling price per unit: $20
Raw materials cost per unit: $10
Variable labour cost per unit: $2
Fixed production costs: $40,000
Mrs Green has approached you and would like to buy 10,000 widgets in a one-off special order. She is willing to pay $15 per widget. As Mrs Green has superior taste she would like each widget to be branded with the Green Farm's Family Crest. You have done your research and have found two options:
1) An outside supplier who can provide the branding for $1 per widget.
2) Lease a new machine solely for branding the widgets. If this option was taken, depreciation on the lease machine would be $4,000 for the year and lease cost would be $3,000.
Considering all of the facts given, calculate the profit for each option and recommend which Mr Brown should take.
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