The Vittetaw Company Ltd, a maker of a variety of metal and plastic products, is in the midst of a business downturn and is saddled with many idle facilities. The National Hospital Supply Company Ltd has approached Vittetaw ltd to produce 3,00,000 nonslide serving trays, National will pay Rs12 for each.

Vittetaw predicts that its variable cost will be Rs13 each. However, its fixed cost, which has been averaging Rs10 per unit on a variety of other products, will now be spread over twice as much volume.

The managing director commented, Sure, we will lose Rs1 each on the variable cost, but we will gain Rs5 per unit by spreading our fixed cost. Therefore, we should take the offer because it represents an advantage of Rs4 per unit.

Do you agree with the managing director? Why? Suppose the regular business had a current volume of 3,00,000 units, sales of Rs60,00,000, variable costs of Rs39,00,000 and fixed costs of Rs30,00,000. Show your working of operating incomes or loss without acceptance of the bid and with acceptance of the bid.