Question

Peters Company makes a product that regularly sells for $ 13.00 per unit

The product has variable manufacturing costs of $10.50 per unit and fixed manufacturing costs of $1.60 per unit (based on $208,000 total fixed costs at current production of 130,000 units). Therefore, total production cost is $12.10 per unit. Peters Company receives an offer from Hayden Company to purchase 4,800 units for $7.00 each. Selling and administrative costs and future sales will not be affected by the sale, and Peters does not expect any additional fixed costs.

Please answer 7 and 8 Thank you

Answer 1

7	Expected Increase in Revenue(4,800*$7.00)	$                                         33,600
	Expected Increase in Variable manufacturing cost(4,800*$10.50)	$                                         50,400
	Expected Increase/(decrease) in operating Income	$                                        -16,800
	Peters should REJECT the offer because Operating Income will DECREASE.
8	Revenue at capacity sales price(4800*$7.00)	$                                         33,600
	Less:Revenue at regular sales price(4800*$13)	$                                         62,400
	Expected Increase/(decrease) in revenue	$                                        -28,800
	Peters should REJECT the offer because Operating Income will DECREASE.