Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 80% capacity. The windows usually sell for $20.00 each. Costs for each window follow: The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:
A)Reject the offer because it currently does not have enough capacity to accept the order.
B)Reject the order because the company will lose $20,000 on the order.
C)Accept the offer because the company will realize $20,000 in additional contribution margin.
D)Accept the offer because the company will realize $40,000 in additional contribution margin.

Question

Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 80% capacity. The windows usually sell for $20.00 each. Costs for each window follow:  The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:
A)Reject the offer because it currently does not have enough capacity to accept the order. 
B)Reject the order because the company will lose $20,000 on the order. 
C)Accept the offer because the company will realize $20,000 in additional contribution margin. 
D)Accept the offer because the company will realize $40,000 in additional contribution margin.

Quizplus · Accepted Answer

Bradley has enough excess capacity to manufacture 20,000 additional units (100,000 x (1 - .80). The relevant costs are:
 11eb16ac_dffd_cc5f_984d_0bb7f0f682f6_TB6154_00 The $12.00 special selling price exceeds the variable costs of $10.00 for a contribution margin of $2.00 each, or a total contribution margin of $20,000 (10,000 x $2.00).