Reference no: EM132217956

Xenon Corp. produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 59,850 units per month is as follows:

Direct material                                                            $71.80

Direct labor                                                                 16.65

Variable manufacturing overhead                                   4.65

Fixed manufacturing overhead                                   22.60

Variable selling and administrative expense                   6.65

Fixed selling and administrative expense                   17.30

Total                                                                          $139.65

The normal selling price of the product is $167.60 per unit.

An order has been received from an overseas customer for 9,300 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $4.00 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

A. What is the advantage(s) to Xenon Corp. of foregoing manufacture of the product for sales by Xenon and instead manufacturing for sales by other companies?

B. What are the dangers of the strategy mentioned in Question A?