An order has been received from abroad, at a price that is 20% lower than the domestic price, for 12,500 units to be supplied during the year. The order must be accepted in its entirety or rejected. Home demand is unlikely to change. Three options are being considered:

1. reject the order

2. accept the order, work to 100% capacity and turn away excess home demand,

and

3. increase factory capacity so that the overseas order can be accepted and home demand metthis would involve purchasing new machinery at an increased relevant cost = $125,000 (depreciation of $75,000 and $50,000 interest on borrowed capital), and renting additional factory space at a cost of $25,000 per annum.

Advise management on the most profitable option and calculate the net profit to be expected.

Wade lnc. has declared the following for the year to 31 Dec 2015 Sales for the year 20,000 units (80% capacity) Direct materials Direct labour Variable overheads $'000 1,600 500 200 100 Fixed costs per annum are $650,000. Plans for the year to 31 Dec 2016 include: the selling price is to remain the same, and costs are expected to increase as follows: Direct materials Direct wages Variable overheads Fixed overheads 2% 15% 10% No increase up to 100% capacity