Golden Wind Office Furniture Company makes all types of office desks. The Home Office 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 home office desks sell for $400. The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Home Office Desk manager refuses 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: Should the order from Executive Division be accepted by Home Office Desk? Explain why or why not? From the perspective of the Home Office 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? What action should the company president take?
Golden Wind Office Furniture Company makes all types of office desks. The Home Office 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 home office desks sell for $400. The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Home Office Desk manager refuses 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: Should the order from Executive Division be accepted by Home Office Desk? Explain why or why not? From the perspective of the Home Office 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? What action should the company president take?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question 9.3
Golden Wind Office Furniture Company makes all types of office desks. The Home Office 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 home office desks sell for $400.
The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Home Office Desk manager refuses 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:
- Should the order from Executive Division be accepted by Home Office Desk? Explain why or why not?
- From the perspective of the Home Office 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?
- What action should the company president take?
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