Renaldo Ochoa is a skilled machinist who has identified a need for specialized, custom-made containers that store and move biological materials. This market is particularly active in Renaldo's community because of the human genome research at the local university and the numerous biotechnology firms that operate in the area.

Recently, one of Renaldo's long-time customers, a professor at the local university, asked Renaldo for a 25% discount in the coming year. The professor has requested the discount because one of her major federal grants was canceled and it will be at least another year before she can find replacement funding. She expects to place about $50,000 worth of orders (at the pre-discount price) in the coming year, after which she expects to pay full price. Absent a discount, she will not have the funds to place the order.

Renaldo knows that for each $100 in sales, he spends $45 on variable cost items for materials, labor, and so on. He figures that his remaining expenses are fixed at $175,000 per year. Renaldo expects sales for the coming year (without the professor's order) to equal $675,000 or 90% of capacity. Renaldo measures capacity in pre-discounted revenues-that is, as revenue at normal prices.

Required:

a. By how much will Renaldo's profit increase or decrease if he gives the 25% discount to the professor?

b. Assume that at $675,000 in sales Renaldo will be operating at 96% of capacity rather than 90% of capacity. Also, assume that the professor's order cannot be partially fulfilled-it must be taken in full or rejected entirely. How does this piece of information change your answer to part (a)? That is, by how much will Renaldo's profit increase or decrease if he gives the 25% discount to the professor?

c. Continue with part (b), except that at $675,000 in sales Renaldo will be operating at 100% of capacity rather than 90% of capacity. How does this piece of information change your answer to part (a)? That is, by how much will Renaldo's profit increase or decrease if he gives the 25% discount to the professor?