Question

Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 100% capacity. The windows usually sell for $20.00 each. The costs for each window follow:

Direct Materials 5.00
Direct Labor 3.00
Variable factory oh 2.00
Fixed factory oh 4.00
Total $14.00
The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:
1. Reject the order because the company will lose $20,000 on the order
2. Accept the offer because the company will realize $40,000 in additional contribution margin
3. Accept the offer because the company will realize $20,000 in additional contribution margin
4. Reject the offer because it currently does not have enough capacity to accept the order.

Answer 1

To determine whether Bradley should accept the Army's offer to buy 10,000 windows for $12.00 each, we calculate the additional contribution margin. The additional contribution margin is $30,000, so Bradley should accept the offer.

Step-by-step explanation:

To determine whether Bradley should accept the Army's offer to buy 10,000 windows for $12.00 each, we need to calculate the additional contribution margin. The contribution margin is the selling price minus the variable costs per unit. In this case, the selling price is $12.00 and the variable costs per unit are $9.00 (Direct Materials + Direct Labor + Variable factory oh). Therefore, the contribution margin per unit is $12.00 - $9.00 = $3.00.

To calculate the additional contribution margin, we multiply the contribution margin per unit by the number of units offered by the Army. $3.00 x 10,000 units = $30,000.

Since the additional contribution margin is positive ($30,000), Bradley should accept the offer because it will realize $30,000 in additional contribution margin.