Chapter 25, Problem 7TI

Thomas Company makes a product that regularly sells for $12.50 per unit. The product has variable manufacturing costs of $8.50 per unit and fixed manufacturing costs of $2.00 per unit (based on $200,000 total fixed costs at current production of 100,000 units). Therefore, the total production cost is $10.50 per unit. Thomas Company receives an offer from Wesley Company to purchase 5,000 units for $9.00 each. Selling and administrative costs and future sales will not be affected by the sale, and Thomas does not expect any additional fixed costs.

If Thomas Company has excess capacity, should it accept the offer from Wesley? Show your calculations.