Question 3 ( 3 marks)

Gymwear Ltd. manufactures socks. The Athletic Division sells its socks for $6 a pair to outsiders. Socks have manufacturing variable and fixed costs of $2.50 and $1.50, respectively. The division's total fixed manufacturing costs are $105,000 at the normal volume of 70,000 units.

The European Division has offered to buy 15,000 socks at the full cost of $4. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division's relevant operating range.

Required:

Explain whether the Athletic Division should accept the offer.