1. Patio Paradise has been in business for seven years and manufactures tech products. While demand is high, the company has an annual production capacity of 22,000 units.

A summary of operating results for last year is as follows:

Sales (14,000 units @ $970) $13,580,000

Variable costs 5,950,000

Contribution margin 7,630,000

Fixed costs 2,750,000

Net operating profit $ 4,880,000

Patio Paradise expects its regular sales to be 16,000 units next year.

The company must now decide which course of action to take

Option 1

Over the next year, Patio Paradise can use the extra capacity not needed for its expected regular sales to produce 4,000 patio sets which can be sold for $1,180 each, with a variable cost of $400 per drone. This option would result in additional fixed costs of $235,000.

Option 2

A foreign distributor has made a one-time offer to buy a guaranteed 9,000 patio sets at $920 per unit next year. Patio Paradise expects its regular sales to be 16,000 units over the next year. Accepting this offer would result in an additional fixed cost of $170,000 for the year.

1. Assuming Patio Paradise chooses Option 1, calculate the total operating profit for the next year. (3 marks)

2. Assuming Patio Paradise chooses Option 2, calculate the total operating profit for the next year. (3 marks) (Show your calculations)

3. If Patio Paradise decides to forego both options and just produce the regular 16,000 units, calculate the total operating profit for the next year. (3 marks) (Show your calculations)

4. From your calculations above, should Patio Paradise select (a), (b) or (c)? (1 mark)