A company makes surge protectors that are used to protect equipment in electrical storms. The costs associated with making a surge protector are shown below:
Batch Level Set-up $4000 per batch
Engineering $50,000 per year
Advertising $120,000 per year
The company normally makes and sells 10,000 surge protectors per year which are made in batches containing a 1,000 units. Derrick has an opportunity to sell 1000 protectors at a special order price of $24 per unit. Ignoring qualitative factors, the company should
(1)except the offer because it would increase profitability by $2,000 or (2)to reject the offer because it would decrease profitability by $2,000 or(3)except the offer because it would increase revenue by $240,000 or (4)reject the offer because it would decrease profitability by $4,000.
Total Cost of Production: Batch Costs + per unit cost x number of units + product level costs
(10,000 / 1000) x 4000 + 22 x ...
The solution gives different levels of profitability under decision making in different scenarios.