The Home Appliances Company makes all types of kitchen appliances.The Induction Cooktops Division is currently producing 10 000 cooktops per year with a capacity of 15 000.The variable costs assigned to each cooktop are $450 and annual fixed costs of the division are $1 350 000.The Induction Cooktop sells for $600.
The Executive Division wants to buy 5000 cooktops at $420 for its custom home design business.The Induction Cooktops manager refused the order because the price is below variable cost.The executive manager argues that the order should be accepted because it will lower the fixed cost per cooktop from $135 to $90 and will take the division to its capacity,thereby causing operations to be at their most efficient level.
Required:
a.Should the order from the Executive Division be accepted by the Induction Cooktops Division? Why?
b.From the perspective of the Induction Cooktops Division and the company,should the order be accepted if the Executive Division plans on selling the cooktops in the outside market for $630 after incurring additional costs of $150 per cooktop?
c.What action should the company CEO take?
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Question

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The Answer of The Home Appliances Company makes all types of kitchen appliances.The Induction Cooktops Division is currently producing 10 000 cooktops per year with a capacity of 15 000.The variable costs assigned to each cooktop are $450 and annual fixed costs of the division are $1 350 000.The Induction Cooktop sells for $600.
The Executive Division wants to buy 5000 cooktops at $420 for its custom home design business.The Induction Cooktops manager refused the order because the price is below variable cost.The executive manager argues that the order should be accepted because it will lower the fixed cost per cooktop from $135 to $90 and will take the division to its capacity,thereby causing operations to be at their most efficient level.
Required:
a.Should the order from the Executive Division be accepted by the Induction Cooktops Division? Why?
b.From the perspective of the Induction Cooktops Division and the company,should the order be accepted if the Executive Division plans on selling the cooktops in the outside market for $630 after incurring additional costs of $150 per cooktop?
c.What action should the company CEO take?
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The Home Appliances Company Makes All Types of Kitchen Appliances