Question 1
The Bruning Company has the following budgeted income statement for the month of May 2014.
Sales (40,000 units) $2,000,000
Cost of goods sold:
Direct materials $300,000
Direct labour 400,000
Variable overhead 200,000
Fixed overhead 600,000 1,500,000
Gross profit margin 500,000
Selling & administrative costs:
Sales commissions (2% of sales 40,000
Delivery costs 20,000
Sales salaries 120,000
Administrative salaries 100,000
Office rental 70,000 350,000
Operating income $ 150,000
The plant has a maximum capacity of 50,000 units. A company salesperson has brought an offer from a new customer to purchase the product at a price of $35.00 per unit. The customer will pick up the order at Bruning's factory.
Required:
1. Analyse the consequences for the company if they accepted the new order and:
a. the customer wished to purchase 8,000 units only.
b. the customer wished to purchase 14,000 units only.
2. What qualitative factors should the company consider in making this type of decision?