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: Compute the impact on operating profit if the special order is accepted. Based on your calculations, explain why you agree or do not agree with the president. Would it be beneficial for Brandon to take a loss on this order if it desires to enter this market? Briefly
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: Compute the impact on operating profit if the special order is accepted. Based on your calculations, explain why you agree or do not agree with the president. Would it be beneficial for Brandon to take a loss on this order if it desires to enter this market? Briefly
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
100%
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:
- Compute the impact on operating profit if the special order is accepted.
- Based on your calculations, explain why you agree or do not agree with the president.
- Would it be beneficial for Brandon to take a loss on this order if it desires to enter this market? Briefly
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education