Goodall Corporation Is Working at Full Production Capacity Producing 10,000 $\$ 2$

question 38

Essay

Goodall Corporation is working at full production capacity producing 10,000 units of a unique product,RST.Manufacturing costs per unit for RST follow:
Direct material                                              $\$ 2$
Direct manufactuing labor                            3
Manufacturing overhead                                $\underline{5}$
                                                                    $\underline{\$10}$
The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed costs of $30,000 (at full capacity of 10,000 units). The non-manufacturing costs, all variable, are $4 per unit, and the selling price is $20 per unit. A customer, Hendricks Company, has asked Goodall to produce 2,000 units of a modification of RST to be called XYZ. XYZ would require the same manufacturing processes as RST. Hendricks Company has offered to share equally the non-manufacturing costs with Goodall. XYZ will sell at $15 per unit.
Required:
a. What is the opportunity cost to Goodall of producing the 2,000 units of XYZ (assume that no overtime is worked)?
b. The Winters Company has offered to produce 2,000 units of RST for Goodall, so Goodall can accept the Hendricks offer. Winters Company would charge Goodall $14 per unit for the RST. Should Goodall accept the Winters Company offer?
c. Suppose Goodall had been working at less than full capacity producing 8,000 units of RST at the time the XYZ offer was made. What is the minimum price Goodall should accept for XYZ under these conditions (ignoring the $15 price mentioned previously)?

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Definitions:

Predictor Variables

Variables in a statistical model that are used to predict or explain changes in the response variable.

With Interaction

A term indicating that the effect of one variable on a response variable depends on the level of another variable.

Interaction Term

An interaction term in statistics is a variable created from the product of two or more variables to capture the effect of their interaction on a dependent variable.

Dependent Variable

A variable in an experiment that is affected by changes in the independent variable.