Rasoi Equipment manufactures a variety of cooking equipment and related accessories. The data given below is for a special heavy-duty exhaust fan.

Annual production capacity (units) .......................... 10,000
Price (per unit) ......................................................... $240.00
Variable cost of manufacturing ............................... 120.00
Fixed manufacturing cost .......................................... 36.00
Fixed selling and administrative cost ....................... 24.00
Profit .......................................................................... $ 60.00

The company is evaluating how best to use its production capacity. One option is that it can use the existing capacity to manufacture industrial ovens. This option is attractive because a competitor has offered to supply 10,000 exhaust fans at a price of $150 per fan. The following information pertains to the manufacture of industrial ovens:

Annual production capacity (units) ................... 7,000
Price (per unit) ................................................. $360.00
Variable cost of manufacturing ....................... 240.00

There will be no change in the fixed manufacturing and selling and administrative costs.

A government agency is looking to purchase industrial ovens that will meet additional standards for quality and reliability. The agency has offered to pay $400 for each oven and is prepared to purchase up to 7,000 oven. The ovens, if made by Rasoi, will require a special finishing process to meet the agency’s standards. The special finishing process will cost $60 per oven in variable production cost. The additional processing will result in production decreasing to 6,500 units (i.e., a loss of 500 units). The additional processing will increase fixed manufacturing costs by $12 per oven based on a volume of 6,500 ovens.

Required:

Write a memorandum to the president of Rasoi Equipment outlining the options, and recommending an appropriate course of action. Include all supporting computations as an appendix to your memo.