The General Eclectic Company manufactures an electric toaster. Sales of the toaster have increased steadily during the previous five years, and, because of a recently completed expansion program, annual capacity is now 500,000 units. Production and sales during the upcoming year are forecast to be 400,000 units, and standard production costs are estimated as follows:

In addition to production costs, GE incurs fixed selling expenses of $1.50 per unit and variable warranty repair expenses of $1.20 per unit. GE currently receives $20 per unit from its customers (primarily retail department stores), and it expects this price to hold during the coming year.
After making the preceding projections, GE received an inquiry about the purchase of a large number of toasters by a discount department store. The inquiry contained two purchase offers:
• Offer 1: The department store would purchase 80,000 units at $14.60 per unit. These units would bear the GE label and be covered by the GE warranty.
• Offer 2: The department store would purchase 120,000 units at $14.00 per unit. These units would be sold under the buyer’s private label, and GE would not provide warranty service.
A. Evaluate the incremental net income potential of each offer.
B. What other factors should GE consider when deciding which offer to accept?
C. Which offer (if either) should GE accept?Why?

  • CreatedFebruary 13, 2015
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