Question

Waterways mass-produces a special connector unit that it normally sells for $3.80. It sells approximately 34,000 of these units each year. The variable costs for each unit are $2.30. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 14,000 of these units at $2.60 per unit. The production of these units is near full capacity at Waterways, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit. An irrigation company has asked for a special order of 1,900 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.10 per unit. What are the consequences of Waterways agreeing to provide the 14,000 units to the Canadian company? Would this be a wise special order to accept? Waterways accept the special order because net income by $ e Textbook and Media Should Waterways accept the special order from the irrigation company? Waterways accept the special order because net income by $ e Textbook and Media What would be the consequences of accepting both special orders? Accepting both special orders would net income by $ Activate Wil Go to Settingst

Answer 1

If Company accept Canadian Co. Order

Particulars
	Present Condition	Additional Units
Sale (unit)	34000	14000
Sale price/unit	3.80	2.60
Sale amount	129200	36400
Less: Variable Cost at Present Condition (2.30*34000)             Variable Cost For Additional Units (2.30 + 0.30)*14000	(78200)	(36400)
Add : Saving in Selling exp ('0.20*14000)		2800
Gross Profit	$51000	$2800
Total Gross profit of the company will be 51000+2800 = $ 53800.

Hence Waterways should Accept the order because net income increase by $2800

If Company accept Irrigation Order

Effect on income from order of irrigation company

                 = (unit Sale Price - Unit Variable Cost)* Sales Units
                 = (3.10 - 2.30)*1900
                   = $1520

Waterways should accept the offer from irrigation company since net income increase by $1520

If Company accept Both Order

On Accepting both offers, Net Income Increase = $2800+$1520 =$4320

Hence, Accepting both offers would increase net income by $4320