The Home Office Company Makes All Types of Office Desks

question 55

Essay

The Home Office Company makes all types of office desks.The Computer Desk Division is currently producing 10 000 desks per year with a capacity of 15 000.The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900 000.The computer desk sells for $400.
The Executive Division wants to buy 5000 desks at $280 for its custom office design business.The Computer Desk manager refused the order because the price is below variable cost.The executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity,thereby causing operations to be at their most efficient level.
Required:
a.Should the order from the Executive Division be accepted by the Computer Desk Division? Why?
b.From the perspective of the Computer Desk Division and the company,should the order be accepted if the Executive Division plans on selling the desks in the outside market for $420 after incurring additional costs of $100 per desk?
c.What action should the company CEO take?
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Definitions:

Short Run

A period in economics where at least one factor of production is fixed, limiting the firm's ability to adjust to changes in market demand.

Variable Costing

An accounting method where variable costs are charged to cost units and fixed costs are treated as period costs.

Cost Behavior

Refers to the way different types of production costs change when there is a change in the level of production.

Special Order

A one-time order not considered part of the company's normal ongoing operations, often requiring special pricing and production considerations.