Reference no: EM133180319
Question - Good Luck Limited manufactures and markets an USB product which they sell for $90 per unit. Current sales and production volume is 200,000 units per month which represents 80% of the production capacity.
Total cost for the last month was $14,000,000 of which $4,000,000 were fixed costs. This represented a total cost of $70 per unit.
They have been approached by two customers for special production order:
(1) Customer A offers to buy additional 50,000 units of product per month for a unit price of $65 per unit.
(2) Customer B offers to buy 100,000 units of products per month at a price of $100 per unit, with a requirement of changing the outer shell design to make the product look more appealing to users. In order to perform the change, Good Luck Limited would need to incur additional $1,000,000 fixed cost per month.
When considering the two separate offers, Good Luck Limited decides that current production for existing customers should be maintained and should not be reduced.
Required -
(a) Explain "opportunity cost" and "sunk cost". Discuss whether they are relevant for decision making.
(b) Determine whether Company's A offer is acceptable. Support your answer with calculations of additional contribution and additional profit earned if the offer is accepted.
(c) Determine whether Company's B offer should be acceptable with reference to the production capacity of the company.
(d) Suggest SIX possible factors that need to be considered before accepting the special order from customer A.
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