The Decor Company produces all types of furniture. The Office Chair Division is currently producing 10,000 chairs per year with a capacity of 15,000. The variable costs assigned to each chair are $300 and annual fixed costs of the division are $900,000. The office chair sells for $400. The Interior Design Division wants to buy 5,000 chairs at $280 for its office interior design business. The Office Chair manager refused the order because the price is below variable cost. The Interior Design manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level.
Required:
a. Should the order from the Interior Design Division be accepted by the Office Chair Division? Why?
b. From the perspective of the Office Chair Division and the company, should the order be accepted if the Interior Design Division plans on selling the desks in the outside market for $420 after incurring additional costs of $100 per desk?

Answer rating: 100% (QA)

a The relevant cost per unit is the variable cost as there is spar... View the full answer