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What will be the real impact on the company net income

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Reference no: EM132552520

Blackburn Cosmetics produces and sells a popular beauty product that sells for $20 each. Its factory has a capacity of producing 20 000 units, but currently working at 80% capacity. It has the following per unit cost data:

Chemicals and powders $9.50

Direct labour 2.50

Packaging and wrapping 2.00

Variable overhead 0.80

Sales commission 0 20

Fixed costs 0.97

Total cost $15.97

An offshore importer from a country where Blackburn's products are not sold has approached the company to buy 4 000 units of the product at an offer price of $15 per unit.

The Sales Manager is very keen on serving this potential importer as she has spent a lot of time and efforts in landing the order. However, the cost accountant is strongly opposing the proposal as the offer price is below its production cost. He argues that accepting the offer will reduce the overall profit of the company by (4 000 x $0.97) $3 880.

Required:

Question a. Do you agree with the Accountant's calculations? Why or why not?

Question b. Which of the above costs are not relevant in making accept, or reject decision in this case? Why?

Question c. What will be the real impact on the company's net income if the offer is accepted?

Question d. How may your decision in (c) above be affected if the importer wants the product to be labelled in their brand name and should carry their logo?

Question e. The Production Manager argues that accepting the offer would increase the annual fixed costs by $5 000. Do you agree with him? Why, or why not?

Reference no: EM132552520

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