Canvas Company manufactures sonars for fishing boats. Its Model 70 sells for $310. Canvas produces and sells 5,700 of them per year. Cost data follow:
$$\begin{array} { | l | r | l | }
\hline \text { Variable manufacturing } & \$ 110 & \text { per unit } \
\hline \text { Variable selling and administrative } & \$ 16 & \text { per unit } \
\hline \text { Fixed manufacturing } & \$ 290,000 & \text { per year } \
\hline \text { Fixed selling and administrative } & \$ 160,000 & \text { per year } \
\hline
\end{array}$$ Alejandro Bauista, the sales manager, wants to offer a special sale to a new customer that outfits boats. He proposes a sale of 41 units at a special price of $150 per unit. Alejandro believes that it will not affect the company's regular sales in the long run because it is a one-time transaction. The sale will require the normal variable costs, both selling and administrative costs and manufacturing costs, but will not impact the fixed costs. The president of the company has some reservations but finally agrees to make the deal if and only if it adds a minimum of $1,600 to operating income. Based on the president's criteria, Canvas will not make the offer.

Question

Canvas Company manufactures sonars for fishing boats. Its Model 70 sells for $310. Canvas produces and sells 5,700 of them per year. Cost data follow:
 $$\begin{array} { | l | r | l | } 
\hline \text { Variable manufacturing } & \$ 110 & \text { per unit } \
\hline \text { Variable selling and administrative } & \$ 16 & \text { per unit } \
\hline \text { Fixed manufacturing } & \$ 290,000 & \text { per year } \
\hline \text { Fixed selling and administrative } & \$ 160,000 & \text { per year } \
\hline
\end{array}$$ Alejandro Bauista, the sales manager, wants to offer a special sale to a new customer that outfits boats. He proposes a sale of 41 units at a special price of $150 per unit. Alejandro believes that it will not affect the company's regular sales in the long run because it is a one-time transaction. The sale will require the normal variable costs, both selling and administrative costs and manufacturing costs, but will not impact the fixed costs. The president of the company has some reservations but finally agrees to make the deal if and only if it adds a minimum of $1,600 to operating income. Based on the president's criteria, Canvas will not make the offer.

Quizplus · Accepted Answer

The sale of 41 units at a special price of $150 per unit will generate revenue of $6,150 ($150 x 41), but the variable costs for producing and selling those units will be $5,610 (5,700 units x $310 selling price x 70% variable cost ratio x 41 units sold at the special price). This leaves a contribution margin of only $540 ($6,150 - $5,610), which is not enough to cover the additional selling and administrative costs required for the sale. Therefore, the company will not meet the president's requirement of adding a minimum of $1,600 to operating income and should not make the offer.

Canvas Company Manufactures Sonars for Fishing Boats Alejandro Bauista, the Sales Manager, Wants to Offer a Special