Computer Products Corp. sells peripheral equipment used by both private businesses and the government. Due to a recession, Computer Product’s sales have declined by 100,000 units and it now has 200,000 units of excess capacity. All of its current sales are to private sector customers and each pays $12.00 per unit for the equipment. The sales price is equal to 150% of average variable costs. A government agency has offered to purchase 300,000 units at $10.00 each. If Computer Products accepts the offer, it will not be able to fill 100,000 units of its expected orders from private sector customers over the next few months, although the inability to meet customer demand is not expected to affect future sales.
a. Should Computer Products accept the offer to supply 300,000 units at $10 each to the government agency? What happens to its profits if it accepts the offer?
b. Would your answer change if the inability to meet private sector customer demand reduces sales of 50,000 during this (ignore any effects beyond this period)?