Deciding Whether the Red Car Division Should Accept the Offer
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Autocar Company manufactures automobiles. The Red Car Division sells its red cars for $25,000 each to the general public. The red cars have manufacturing costs of $12,500 each for variable and $5,000 each for fixed costs. The division's total fixed manufacturing costs are $25,000,000 at the normal volume of 5,000 units.
The Blue Car Division has been unable to meet the demand for its cars this year. It has offered to buy 1,000 cars from the Red Car Division at the full cost of $18,000. The Red Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000. The 6,000 volume is within the division's relevant operating range.
Explain whether the Red Car Division should accept the offer. Support your decision showing all calculations.
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Solution Summary
The solution explains whether the Red Car Division should accept the offer.
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The Red Car division should accept the offer. Red car should evaluate the offer based on its incremental costs in producing the cars.
Red Car has excess capacity and so the incremental costs ...
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