1. B

M PART I FINANCE FUNDAMENTALS QUESTIONS (a) Explain how the firm's accountant used the information in Exhibit 16 determine that the average or unit cost of a copper is $1,585. (b) Evaluate his argument that it does not make sense to sell 4,000 copiers to the petroleum company since the offer price of $1,200 is below the unit cost of $1,585. 28 PART I FINANCE FUNDAMENTALS THE COPIER PROBLEM The firm recently has received an offer from a very large petroleum corporation to purchase 4,000 copiers at $1,200 a unit, which is 20 percent under the usual price of $1,500. On one hand, the offer is quite welcome. Dover's copier opera- tion is the only area of the firm that experienced a loss during the last three months. Copier sales are down and significant excess capacity exists in this part of the firm's operation. In fact, Dover could fill the petroleum company's order with no strain on its production facilities. The company's thief accountant, Timothy Wiles, is "the other hand." Wiles is adamant that accepting the offer is a "losing proposition." He cites as evidence the most recent income statement of the copier operation. (See Exhibit 1.) He notes that unit sales price has been $1,500, and the information in Exhibit 1 indicates that unit or average cost is $1,585. Wiles' argument is that to sell these copiers at a price of $1,200 will only "put the copier operation even more in the red" since this price is well below the operation's average cost. Mark Thatcher is a finance officer and is skeptical of Wiles' argument. Thatcher believes that what is needed is an estimate of the aparginal or incre- mental cost incurred if 4,000 additional copiers are produced. He is not con- vinced that Wiles' numbers capture such costs. CASE 5 DOVER INTERNATIONAL 31 (b) Based on your answer to part (a) and other information in the case, would you recommend that a vendor be used? Explain. EXHIBIT 1 Income Statement of the Copier Operation Sales $15,000,000 CGS 2.000.000 Gross profit 6,000,000 FOC 5,500,000 Depreciation 600.000 EBIT Interest 250.000 Eamings before taxes (850.000) 10,000 copiers at $1,500 a unit. "Cost of goods sold. Includes direct labor and material costs $900 per copier. Fixed operating costs. Doesn't include depreciation. Does include items such as supervisory salaries, marketing expenses, secretarial support, property taxes, and corporate foes. (100.000 EXHIBIT 2