Question

Waterways mass-produces a special connector unit that it normally sells for $4.10. It sells approximately 34,100 of these units each year. The variable costs for each unit are $2.50. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 16,500 of these units at $2.80 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 2,000 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.30 per unit. What are the consequences of Waterways agreeing to provide the 16,500 units to the Canadian company? Would this be a wise "special order" to accept? by $ accept the special order because net income Waterways should increases eTextbook and Media Should Waterways accept the special order from the irrigation company? by $ Waterways accept the special order because net income should increases eTextbook and Media

Answer 1

Part 1

If Canadian company special order is accepted, variable manufacturing cost will increase by $0.30 per unit and variable selling cost will reduce by $0.20 per unit

Variable cost per unit in special order = 2.50 + 0.30 - 0.20

= $2.60

Selling price in special order = $2.80 per unit

Special order size = 16,500 units

Profit from special order from Canadian company = (Selling price in special order - Variable cost per unit in special order) x Special order size

= (2.80 - 2.60) x 16,500

= $3,300

Waterways should accept the special order since net income increase by $3,300

Part 2

Variable cost per unit in special order = 2.50

Selling price in special order = $3.30 per unit

Special order size = 2,000 units

Profit from special order from Irrigation company = (Selling price in special order - Variable cost per unit in special order) x Special order size

= (3.30 - 2.50) x 2,000

= $1,600

Waterways should accept the special order since net income increase by $1,600

Please ask if you have any query related to the question. Thank you