Mark Haines Ltd. manufacturers and sells a single product. The company has the capacity to produce and sell 30,000 units per year. Costs and revenues associated with this level of operations are given below:

	Per Unit
DM	15
DL	8
Variable manufacturing overhead	3
Variable selling	4
Fixed manufacturing overhead	9
Fixed selling	6
Total	45

The selling price is $50 per unit. Haines expects to sell only 25,000 units next year through regular channels. J. Kernen Ltd., a large discount chain, has offered to buy 5,000 units if Haines will lower its price by 16%. As this is a direct sale, there would be no sales commission, reducing variable selling expenses by 75%. However, the purchaser would require a slight modification to the product, necessitating Haines to buy a special piece of equipment for $10,000.

Required:

1. What would be the effect on cash flows next year if Haines accepted the offer from J. Kernen Ltd.? 2. Bartiromo Ltd., a different firm, wishes to make a one-time purchase of 5,000 units, (The regular production and sales for Mark Haines Ltd. are expected to be 25,000 units). Bartiromo would pay on a "manufacturing cost plus" basis and pay Haines $1.80 per unit above its full cost of production. Bartiromo would pick up the units in its own trucks, so there would be no selling costs. If Haines accepts the offer, what would be the effect on profits? 3. Which option would you prefer?