XYZ Company manufactures a component that is used in electric vehicles. Although it has the capacity to manufacture 5,000 components a month without an increase in fixed costs, it typically manufactures and sells 4,500 components a month to 8 regular customers.

The cost to manufacture one of the components is:

Direct materials$14.00

Direct labour$35.00

Variable manufacturing overhead$1.00

Fixed manufacturing overhead allocated$22.22 ($100,000 / 4,500 components)

Variable sales cost is $10.00 per component and fixed sales and administration cost is $95,000 per month.

The company sells the components for $111 each.

XYZ Company has been approached by a new customer. The customer wants to buy 1,500 components next month, but wants a special price of $70 per component. The variable sales cost of $10.00 per component will not apply to this customer. The customer has indicated that, if it is satisfied with XYZ Company's component and service, it will seriously consider becoming a regular customer.

XYZ Company can increase manufacturing capacity to 7,000 components per month by signing a 2-year minimum lease on a new factory for $72,000 per year.

Part 1:

Questions:

a.Calculate if XYZ Company should accept the customer's offer. If so, should it increase capacity or decrease sales to other customers? Show all calculations clearly.

b.Shortly discuss two considerations, other than profitability calculated above, that XYZ Company should consider when making the decision.

Part 2:

Assume the customer is prepared to sign a 2-year contract to buy the component, but wants to negotiate a special price. Also assume XYZ Company decided to increase capacity by leasing the new factory.

Question:

What is the minimum price that XYZ Company should accept? Show all calculations clearly.