(8) Medici Corporation, the maker of a variety of rubber products, is in the midst of a business downturn and has many idle facilities. Nationwide Tire Company has approached Medici to produce 300,000 oversized tire tubes for $2.40 each.
Medici predicts that its variable costs will be $2.60 each. Its fixed costs, which had been averaging $2.00 per unit on a variety of products, will now be spread over twice as much volume. The president commented, “Sure we will lose $.20 each on the variable costs, but we will gain $1 per unit by spreading our fixed costs over more units. Therefore, we should take the offer because it would gain us $.80 per unit.”
Medici currently has a volume of 300,000 units, sales of $1,200,000, variable costs of $780,000, and fixed costs of $600,000.
(a) Compute the impact on operating profit if the special order is accepted.
(b) Based on your calculations, explain why you agree or do not agree with the president.
(c) Would it be beneficial for Medici to take a loss on this order if it desires to enter this market? Briefly discuss.