Reference no: EM132806043

Question - It is year 2076 and after retiring as the CEO of the Thunder Bay hospital, you started a flying car business called Lakehead Motor Co. Lakehead sells and manufactures a flying car, with a sales price of $94,000. The company has the capacity to sell 30,000 flying cars per year. Costs and revenues are follows:

Direct Materials $19,000

Direct Labour: $14,000

Var. OVH: $5,000

Var. SELL: 10% of Selling Price

Fix. OVH: $4,400

Fix. SELL: $2,000

As flying cars are relatively new, Lakehead Motors expects to sell only 26,000 cars next year in its dealerships. Ford Motor Co. has recently become interested in selling a flying version of its Mustang car. Hence, they want to test market the flying car with 4,000 units and buy these from Lakehead at a discount of 22%. As this is a direct sale, there would be no sales commission, reducing variable selling expenses by 55%. However, Ford needs some modifications to make it "Built Ford tough" which requires buying a $100,000 machine.

What effect on Lakehead's cash flow would occur if they accept Ford's offer?

How would your answer to (a) differ if you were all of a sudden able to sell 27,000 from your dealership?

What qualitative factors should weigh in your decision?