TrueValue Company Makes All Types of Office Desks

question 141

Essay

TrueValue Company makes all types of office desks.The General 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 General desk sells for $400.
The Executive Division wants to buy 5,000 desks at $270 for its custom office design business.The General 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 General Desk Division? Why?
b.From the perspective of the General 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 president take?

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Definitions:

Knowledge Worker

An individual whose primary job involves processing and working with information or knowledge, rather than manual labor.

Fertilizer

A chemical or natural substance added to soil or land to increase its fertility and enhance plant growth.

Wholesale

The sale of goods in large quantities, often to be retailed by others.

Daycare Playground

A specialized outdoor area equipped with child-safe recreational facilities, designed for children at daycare centers.