Question

The fixed overhead costs are unavoidable. A local Austin company recently offered to buy 3,000 pairs of shoes at $21 per pair. If Wang Company can accept the special order without disrupting its current business (Wang Company has excess capacity), should it accept the order? No other costs will be incurred if Wang Company decides to accept the order.

Answer 1

Yes, it should accept the offer

Step-by-step explanation:

The factors to be considered in determining whether Wang company should accept the offer includes;

• Opportunity cost - This is the revenue that will be lost by the company if it decides to accept the special order. From the question, this is nil as the company has excess capacity and current activities will not be disrupted by accepting the special offer.
• Additional cost - This is also nil. The company has excess capacity and the fixed overhead cost are unavoidable.

Based on the considerations above, accepting the offer would be profitable to Wang company hence it should accept the offer.