Expected increase in variable manufacturing costs

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Reference no: EM13827175

Peters Company makes a product that regularly sells for $11.00. The product has variable manufacturing costs of $11.50 per unit and fixed manufacturing costs of $1.60 per unit (based on $180,00 total fixed costs at current production of 120,000 units. Therefore, total production cost is $13.10. Peters Company receives an offer from Holden Company to purchase 5,000 units for $8.50 each. Selling and administrative costs and future sales will not be affected bu the sale and peters does not expect any additional fixed costs.

1. If Peters Company has excess capacity, should it accept the offer from Holden? Show your calculations

Expected increase in revenue -

Less: Expected increase in variable manufacturing costs ___________________

Expected increase (decrease) in operating income

Peter should accept/reject the offer because incomes will __________________

2. Does your answer change if Peters Company is operating at capacity? Why or why not?

Revenue at capacity sale price

Less: Revenue at regular sale price

Expected increase (decrease) in revenue

Peter should accept/reject the offer of operating at capacity because operating income will ________________

Reference no: EM13827175

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