Midwest Company manufactures portable radios. Shop Smart, a large retail merchandiser, wants to buy 200,000 radios from Midwest for $12 each. The radio would carry Shop Smart’s name and would be sold in its stores.

Midwest normally sells 420,000 radios per year at $16 each; its production capacity is 540,000 units per year. Cost information for the radios is as follows:

Production costs:

Variable production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7

Fixed manufacturing overhead ($2,100,000 ÷ 420,000 units) . . . . . . . . . . . . . . . . . . . . . 5

Selling and administrative expenses:

Variable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Fixed ($420,000 ÷ 420,000 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

The $1 variable selling and administrative expenses would not be applicable to the radios ordered by Shop Smart because that is a single large order. Shop Smart has indicated that the company is not interested in signing a contract for less than 200,000 radios. Total fixed costs will not change regardless of whether the Shop Smart order is accepted.

Required:

1. Identify any opportunity costs that Midwest should consider when making the decision.

2. Determine whether Midwest should accept Shop Smart’s offer.

3. Interpretive Question: What qualitative factors might be relevant to this decision?