Question: Effects on operating income pricing decision Teguchi Manufacturing is a

Effects on operating income, pricing decision. Teguchi Manufacturing is a manufacturer of electronics components. Income data for one of the products (XT-107) for the month just ended are as follows:
Teguchi has capacity to produce 250,000 units each month, and its current average sales level is 175,000 units per month. Recently Andrews Ltd. approached one of Teguchi’s sales representatives and asked if Teguchi could supply a one-time order of 5,000 units of the XT-107. Its current supplier is moving to a new factory and has temporarily suspended production. Andrews has offered a selling price of $98 per unit. Sales commissions on this order can be negotiated at a flat fee of $9,500, instead of the normal 12% of sales. All other costs would behave as with regular production.
1. From a financial perspective, should Teguchi accept the order? (Calculate the change in monthly operating income if the order is accepted.)
2. The general manager of Teguchi is concerned about accepting the order at the $98 selling price. He is afraid of the precedent that might be set by cutting the price and that Andrews might expect the same price concessions in the future. He has stated that he believes the sales representative should quote the regular price of $125 and argues that the $98 is below the full cost (excluding the commission) of $100 per unit. Do you agree with the general manager? Explain.

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  • CreatedJuly 31, 2015
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