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Sleeping Giant Oil manufactures a single product engine oil. The company can produce and sell 30,000 units per year. Costs and revenues with this level
Sleeping Giant Oil manufactures a single product engine oil. The company can produce and sell 30,000 units per year. Costs and revenues with this level of operations are given below: a) Direct materials per unit = $15 b) Direct labour per unit = $8 c) Variable overhead = $3 d) Fixed overhead = $9 e) Fixed Selling = $6 The selling price is $50 per unit. Sleeping Giant Oil expects to sell only 25,000 units next year through regular channels. A large discount chain has offered to buy 5,000 units if Sleeping Giant Oil will lower its price by 16%. As this would be 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 Sleeping Giant Oil to buy a special piece of equipment for $10,000. Note that parts (a) and (b) are independent of each other. a. What would be the effect on cash flows next year if Sleeping Giant Oil accepted the offer from the discount chain? How would your answer be different if the current level of sales was 28,000 units? b. The Ministry of Transportation wishes to make a one-time purchase of 5,000 units (regular production and sales are expected to be 25.000 units). The ministry would pay on a "manufacturing cost plus" basis and also pay Sleeping Giant Oil $1.80 per unit above its full cost of production. The ministry would pick up the units in its own trucks, so there would be no selling costs. If Sleeping Giant Oil accepts the offer, what would be the effect on profits? C. Assume that Sleeping Giant Oil can sell 30.000 units without the ministry's order. On the basis of financial/quantitative analysis only, should Sleeping Giant Oil accept the ministry's order
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