Answer Happy

The Consumer Products division of eli house of aplliences
has been struggling lately. Management has noticed a steady level
of losses being reported and is concerned about how to turn the
division around. The division manager reports that the production
of toasters is causing the issue. She has prepared the following
summary of monthly costs and operations.
Costs for finished toasters
Direct materials
$ 35/unit
Direct labor
$ 45/unit
Variable overhead
$ 25/unit
Fixed overhead
$ 13/unit
Variable selling and administrative expenses
$ 2/unit
Fixed selling and administrative expenses
$ 3/unit
Selling price
$ 125/unit
Maximum production capacity
20,000 units/month
Current production / Sales levels
15,000 units/month
The sales department has received an offer for a new monthly
contract for 3,000 finished toasters for $ 110 each from a vendor
in south America. The vendor will use an inferior heating
element (direct material) reducing the material cost by $ 2 per
toaster. Variable overhead will increase
by ten percent to accommodate the inferior element.
The variable selling and administrative expenses will not occur
because the contract was not bought in by the sales staff.
However, the monthly shipping charge will be $ 7,500. The
vendor is requiring the toasters to be marked with the company’s
logo to ensure marketability.
Required: Please advise
management. Be sure to demonstrate capacity issues,
profitability issues, and other issues.