Generators, Inc. produced emergency backup generators for use in large commercial buildings. The costs of manufacturing and marketing the generators at the company's normal volume of 3,000 units per month are shown
Costs per Unit for Generators
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Unit Manufacturing costs:
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Variable Materials
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$1,000
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|
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Variable Labor
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1,500
|
|
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Variable Overhead
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500
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|
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Fixed Overhead
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1,200
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|
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Total Manufacturing Cost
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$4,200
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Unit Marketing Costs:
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Variable
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500
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Fixed
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1,400
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|
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Total Marketing Cost
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1,900
|
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Total Unit Cost:
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$6,100
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The following questions refer only to the data given above. Unless otherwise stated, assume there is no connection between situations described in each of the questions, each is to be treated independently. Unless otherwise stated, a regular selling price of $7,400 per unit should be assumed.
On March 1, a contract offer is made to Redi-Watt by the federal government to supply 500 units to the Veterans Administration hospitals for delivery by March 31. Because of an unusually large number of rush orders from their regular customers, Redi-Watt plans to produce 4,000 units during March, which will use all available capacity. If the government order is accepted, 500 units normally sold to regular customers would be lost to a competitor. The contract given by the government would reimburse the government's share of March manufacturing costs (fixed and variable) plus pay a fixed fee (profit) of $500,000. There would be no variable marketing costs incurred on the government's units. What impact would accepting the government contract have on March income?