Question
(10 pts) 7. Brandon Corporation, the maker of a variety of rubber products, is in the midst of a business downturn and has many idle
(10 pts) 7. Brandon Corporation, the maker of a variety of rubber products, is in the midst of a business downturn and has many idle facilities. Nationwide Tire Company has approached Brandon to produce 400,000 oversized tire tubes for $3.00 each.
Brandon predicts that its variable costs will be $3.20 each. Its fixed costs, which had been averaging $2.50 per unit on a variety of products, will now be spread over twice as much volume. The president commented, Sure we will lose $.20 each on the variable costs, but we will gain $1 per unit by spreading our fixed costs over more units. Therefore, we should take the offer because it would gain us $.80 per unit.
Brandon currently has a volume of 400,000 units, sales of $1,600,000, variable costs of $1,200,000, and fixed costs of $1,000,000.
Required:
- Compute the impact on operating profit if the special order is accepted.
- Based on your calculations, explain why you agree or do not agree with the president.
- Would it be beneficial for Brandon to take a loss on this order if it desires to enter this market? Briefly discuss.
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