Question
The Caledonian Company is a manufacturer of clothing that sells its output directly to clothing retailers in the UK. One of its departments manufactures
The Caledonian Company is a manufacturer of clothing that sells its output directly to clothing retailers in the UK. One of its departments manufactures sweaters. The department has a production capacity of 50,000 sweaters per month. Because of the liquidation of one of its major customers the company has excess capacity. For the next quarter, the current monthly production and sales volume is expected to be 35,000 sweaters at a selling price of 40 per sweater. Expected monthly costs and revenues for an activity level of 35,000 sweaters are as follows: Direct labor Direct materials Variable manufacturing overheads Manufacturing fixed (non-variable) overheads Marketing and distribution fixed (non-variable) costs Total costs Sales Profit ($) ($ per unit) 420,000 12 280,000 8 70,000 2 280,000 8 105,000 3 1,155,000 33 1,400,000 40 245,000 N Caledonian is expecting an upsurge in demand and considers that the excess capacity is temporary. Therefore, even though there is sufficient direct labor capacity to produce 50,000 sweaters, Caledonian intends to retain the temporary excess supply of direct labor for the expected upsurge in demand. A leisure company located overseas has offered to buy 15,000 sweaters each month for the next three months at a price of $20 per sweater. The company would pay for the transportation costs and thus no additional marketing and distribution costs will be incurred. No subsequent sales to this customer are anticipated. The company would require its company logo inserted on the sweater and Caledonian has predicted that this will cost $1 per sweater. Should Caledonian accept the offer from the company?
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