Highbank Company Is Operating at 80% of Its Manufacturing Capacity

question 24

Essay

Highbank Company is operating at 80% of its manufacturing capacity of 62,000 product units per year.A customer has offered to buy an additional 10,000 units at $17 each and sell them outside the country so as not to compete with Highbank.The following data are available:
$$\begin{array} { l c r } \text { Costs at 80\%/ capacity: } & { \text { Per } } & \text { Total } \\& \text { Unit } & \\\text { Direct materials } & \$ 4.00 & \$ 198,400 \\\text { Direct labor } & 2.00 & 99,200 \\\text { Overhead (fixed and variable) } & \underline { 5 . 0 0 } & \underline { 248,000 } \\\text { Totals } & \underline { \$ 1 1 . 0 0 } & \underline{ \$ 545,600}\end{array}$$ In producing 10,000 additional units fixed overhead costs would remain at their current level but incremental variable overhead costs of $0.75 per unit would be incurred.What is the effect on total income if Highbank accepts this order?

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Definitions:

Income Distribution

The way in which a nation’s total earnings are spread among its population, affecting the economic inequality among different groups.

Competitive Industry Y

An industry where a large number of firms compete against each other to sell their goods or services, making no single firm able to control the market price.

Substantial Losses

Significant financial deficits encountered by a business, usually indicating a much greater extent of economic damage beyond normal losses.

Output Contract

An agreement between a producer and a buyer to sell and purchase a specific amount of output at a specified price.