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 currently has the capacity to produce 80,000 windows (100,000 x 0.8). The Army has offered to buy 10,000 windows, which would bring Bradley's total production up to 90,000 windows (80,000 + 10,000). Since this is still below Bradley's capacity, the company has enough capacity to accept the order.

To determine the profitability of the order, we need to calculate the contribution margin. The contribution margin per window is the selling price ($20.00) minus the variable cost per window ($12.00 + $6.00 + $1.00 + $0.50 + $0.50 = $20.00). Therefore, the contribution margin per window is $2.00 ($20.00 - $18.00).

The contribution margin for the 10,000 windows is $20,000 (10,000 x $2.00). Since the contribution margin is positive, accepting the order would increase Bradley's profitability. Therefore, the company should accept the offer because the company will realize $20,000 in additional contribution margin.