Brandon Corporation, the maker of a variety of rubber products, is in the midst of a business downturn and has many idle facilities. Nationwide Tire Company has approached Brandon to produce 400,000 oversized tire tubes for $3.00 each. Brandon predicts that its variable costs will be $3.20 each. Its fixed costs, which had been averaging $2.50 per unit on a variety of products, will now be spread over twice as much volume. The president commented, "Sure we will lose $.20 each on the variable costs, but we will gain $1 per unit by spreading our fixed costs over more units. Therefore, we should take the offer because it would gain us $.80 per unit.” Brandon currently has a volume of 400,000 units, sales of $1,600,000, variable costs of $1,200,000, and fixed costs of $1,000,000. Required: a. Compute the impact on operating profit if the special order is accepted. b. Based on your calculations, explain why you agree or do not agree with the president. c. Would it be beneficial for Brandon to take a loss on this order if it desires to enter this market? Briefly discuss.

Brandon Corporation, the maker of a variety of rubber products, is in the midst of a business downturn and has many idle facilities. Nationwide Tire Company has approached Brandon to produce 400,000 oversized tire tubes for $3.00 each. Brandon predicts that its variable costs will be $3.20 each. Its fixed costs, which had been averaging $2.50 per unit on a variety of products, will now be spread over twice as much volume. The president commented, "Sure we will lose $.20 each on the variable costs, but we will gain $1 per unit by spreading our fixed costs over more units. Therefore, we should take the offer because it would gain us $.80 per unit.” Brandon currently has a volume of 400,000 units, sales of $1,600,000, variable costs of $1,200,000, and fixed costs of $1,000,000. Required: a. Compute the impact on operating profit if the special order is accepted. b. Based on your calculations, explain why you agree or do not agree with the president. c. Would it be beneficial for Brandon to take a loss on this order if it desires to enter this market? Briefly discuss.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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