Impala Industries manufactures a component used by car manufacturers.Impala can produce 1,000,000 components per year.A foreign car manufacturer has approached Impala with an offer to purchase 120,000 components at price of $6 per unit.Impala's results for last year are as follows: If Impala accepts the offer, it will only be able to sell 880,000 units at the regular price due to its capacity constraints.What will Impala's total operating income be next year if it accepts the offer?
A)$2,710,000
B)$2,410,000
C)$2,650,000
D)$4,760,000

Question

Impala Industries manufactures a component used by car manufacturers.Impala can produce 1,000,000 components per year.A foreign car manufacturer has approached Impala with an offer to purchase 120,000 components at price of $6 per unit.Impala's results for last year are as follows:  If Impala accepts the offer, it will only be able to sell 880,000 units at the regular price due to its capacity constraints.What will Impala's total operating income be next year if it accepts the offer?
A)$2,710,000 
B)$2,410,000 
C)$2,650,000 
D)$4,760,000

Quizplus · Accepted Answer

If Impala accepts the offer, it will have to sell 120,000 units at $6 per unit, resulting in extra revenue of $720,000 (=$6 x 120,000). However, it will lose the revenue of the 120,000 units it could have sold at the regular price, resulting in a loss of $5,880,000 (=$20 x 120,000 x 0.7). Thus, the net operating income will be $4,760,000 (=$11,880,000 - $720,000). Therefore, it is not the best choice for Impala to accept the offer, as it will result in a significant loss of operating income. The best choice is for Impala to continue selling all of its components at the regular price, as it will result in an operating income of $2,410,000 (=$20 x 1,000,000 x 0.7).

Impala Industries Manufactures a Component Used by Car Manufacturers