Question 4: (3 Points)

Messrs. Marwan & Co. uses 12,500 units of Holiday Lights each year. The full manufacturing cost of one unit of Holiday Lights at this volume is:

Direct materials: $ 40.00

Direct labor: 30.00

Variable manufacturing overhead: 20.00

Average fixed manufacturing overhead: 20.00

Total: $110.00

Messrs. Mirna Lightings has offered to sell Messrs. Marwan & Co. unlimited quantities of Holiday Lights at a unit cost of $100.00. If Marwan & Co. accepts this offer, it can eliminate 60 percent of the fixed costs assigned to Holiday Lights. Furthermore, the space devoted to the manufacture of Holiday Lights can be rented to another company for $50,000 per year.

Required:

a) (2 Points) Determine in dollars, the increase or decrease of annual profits from Messrs. Marwan & Co.

b) (1 Point) Should they accept the offer of Messrs. Mirna Lightings?