Question

Wilson Co. produces tennis rackets. A customer has offered Wilson Co. $400 per unit for 200 units. To fill the order, Wilson would incur unit-level costs of $300 per unit and batch-level costs of $1,000. Wilson also incurred $10,000 of product-level costs to design the racket and $100,000 of facility-level costs. Wilson Co. can rent out its excess capacity for $10,000 if it does not accept the special order. Based on your quantitative analysis, should Wilson Co. accept the special order? What is the effect on profit?

Answer 1

Wilson Co. should not accept the special order from the customer as it would result in a loss of $91,000. Renting out the excess capacity would generate a higher profit compared to accepting the special order.

Step-by-step explanation:

To determine whether Wilson Co. should accept the special order, we need to calculate the profit impact of accepting the order compared to the alternative of renting out excess capacity. Let's start by calculating the total cost of filling the order:

• Unit-level costs: $300 per unit x 200 units = $60,000
• Batch-level costs: $1,000
• Product-level costs: $10,000
• Facility-level costs: $100,000

Total cost = $60,000 + $1,000 + $10,000 + $100,000 = $171,000

Next, let's calculate the total revenue from the special order:

• Price per unit: $400
• Number of units: 200

Total revenue = $400 x 200 = $80,000

Finally, we compare the profit impact by subtracting the total cost from the total revenue:

Profit impact = Total revenue - Total cost = $80,000 - $171,000 = -$91,000

Based on this analysis, Wilson Co. should not accept the special order as it would result in a significant loss of $91,000. Renting out the excess capacity for $10,000 would generate a higher profit compared to accepting the special order.