Mahulena Carpet produced 1,200 yards of its economy-grade carpet. In the coloring process, there was a pigment defect, and the resulting color appeared to be faded. The carpet normally sells for $12 per yard: $6 of variable cost per yard and $4 of fixed cost per yard have been assigned to the carpet. The company realizes that it cannot sell the carpet for $12 per yard through its normal channels, unless the coloring process is repeated. The incremental cost of the process is $2 per yard. However, Practical Home Solutions is willing to buy the carpet in its current faded condition for $8 per yard.

a. Should Mahulena repeat the coloring process or sell the carpet to Practical Home Solutions?
b. Suppose Practical Home Solutions is willing to buy the carpet for $11 per yard if Mahulena’s brand is associated with the carpet by means of a tag indicating the carpet was produced by Mahulena (a highly regarded producer). Would you accept Practical Home Solutions’s offer if you were the president of Mahulena?

  • CreatedSeptember 23, 2013
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