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Question - Relevant Cost Analysis Customer Profitability - Broadway Printers operates a printing press with a monthly capacity of 2,000 machine-hours. Broadway has two main customers, Taylor Corporation and Kelly Corporation. Data on each customer for January follows:
Taylor Corporation
Kelly Corporation
Total
Revenues
$132,000
$88,000
$220,000
Variable costs
46,200
52,800
99,000
Fixed costs (allocated on the basis of revenues)
66,000
44,000
110,000
Total operating costs
112,200
96,800
209,000
Operating invome
$19,800
$(8800)
$11,000
Machine-hours required
1,500 hours
500 hours
2,000 hours
Required -
1. Should Broadway drop the Kelly Corporation business? If Broadway drops the Kelly Corp. business, its total fixed costs will decrease by 20%.
2. Kelly Corporation indicates that it wants Braodway to do an additional $88,000 worth of printing jobs during February. These jobs are identical to the existing business Broadway did for Kelly in January in terms of variable costs and machine-hours required. Broadway anticipates that the business from Taylor Corporation in February will be the same as that in January. Broadway can choose to accept as much of the Taylor and Kelly business for February as it wants. Assume that total fixed costs for February will be the same as the fixed costs in January. What should Broadway do? What will Braodway's operating income be in February?
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