Question

The Montreal Company is an electronics business with eight product lines. Income data for one of the products (XT-107) for June 2012 are:

Dorval Ltd., an instruments company, has a problem with its preferred supplier of XT-107 components. This supplier has had a three-week labour strike. Dorval approaches the Montreal sales representative, Elise Alarcotte, about providing 3,000 units of XT-107 at a price of $75 per unit. Alarcotte informs the XT-107 product manager, Jim McMahon, that she would accept a flat commission of $8,000 rather than the usual 15% of revenue if this special order were accepted. Montreal has the capacity to produce 300,000 units of XT-107 each month, but demand has not exceeded 200,000 units in any month in the past year.
Required
1. If the 3,000-unit order from Dorval is accepted, how much will operating income increase or decrease? (Assume the same cost structure as in June 2012.)
2. McMahon ponders whether to accept the 3,000-unit special order. He is afraid of the precedent that might be set by cutting the price. He says, "The price is below our full cost of $96 per unit. I think we should quote a full price, or Dorval will expect favoured treatment again and again if we continue to do business with it." Do you agree with McMahon? Explain.


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  • CreatedJuly 31, 2015
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