Wear Company Is Operating at 70% of Its Manufacturing Capacity

question 99

Essay

Wear Company is operating at 70% of its manufacturing capacity of 78,000 product units per year.A customer has offered to buy an additional 18,000 units at $41 each and sell them outside the country so as not to compete with Wear Company.The following data are available:
$\begin{array}{lrr}\text { Costs at 70\%/ capacity: } & { \text { Per } } & \text { Total } \\& \text { Unit } & \\\text { Direct materials } & \$ 28.00 & \$ 1,528,800 \\\text { Direct labor } & 3.00 & 163,800 \\\text { Overhead (fixed and variable) } & \underline{7.00} & \underline{\$ 382,200} \\{\text { Totals }} & \underline{\$ 38.00}& \underline{\$ 2.074 .800} \end{array}$ In producing 18,000 additional units fixed overhead costs would remain at their current level but incremental variable overhead costs of $1.28 per unit would be incurred.What is the effect on total income if Wear Company accepts this order?

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Definitions:

Endowments

Funds donated to institutions with the stipulation that the principal remains intact and only the investment income is spent.

After-Tax Rate

The rate of return on an investment after accounting for taxes, more reflective of the net gain to the investor.

Safety Of Principal

The assurance that an investment will be repaid or retained, primarily concerning the preservation of invested capital.

Diversified Portfolio

An investment strategy that involves spreading investments across various asset classes to reduce risk.