Wham Products, a maker of specialty products, is currently manufacturing and selling a product called Gory...

 

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Wham Products, a maker of specialty products, is currently manufacturing and selling a product called Gory Goo. A discount department store, J-Mart, has made a one-time offer to purchase 53,000 units of Gory Goo at $4.50 per unit for sale in J-Mart stores. The name and packaging for these 53,000 units will be changed so as not to appear to be the same as Gory Goo. Since Wham has enough excess capacity, management would naturally like to produce and sell the additional units. But there is concern that $450 is below Gory Goo's unit manufacutring costs and well below it's normal selling price, which is set at 40% above unit manufacturing costs. Last year, Gory Goo's unit sales were 380,000 and its total manufacturing costs were: Direct material $342,000 Direct labor 228,000 Variable overhead 304,000 Fixed Overhead 1,330,000 Total manufacturing $2,204,000 In addition to the manufacturing costs, there were selling and administrative expenses associated with Gory Goo. Variable selling and administrative expenses were $1.60 per unit, and fixed selling and administrative expenses were $171,000. For the special order, unit variable manufacturing costs are expected to be the same as they were last year, and fixed manufacturing costs are not expected to increase. Fixed selling and adminstrative expenses are also not expected to increase, but because the special order units are being sold directly to the J-Mart chain, variable selling and administrative expenses are expected to be only $0.90 per unit. Even though the special order units will have a different name and packaging, Wham's marketing group still believes that approximately 7,000 units from the special order will be sold to customers who would normally purchase Gory Goo from Wham. The group also believes that J-Mart has no other source for the Gory Goo product. REQUIRED If Wham accepts the offer from J-Mart, what will be the effect on firm profits? Wham Products, a maker of specialty products, is currently manufacturing and selling a product called Gory Goo. A discount department store, J-Mart, has made a one-time offer to purchase 53,000 units of Gory Goo at $4.50 per unit for sale in J-Mart stores. The name and packaging for these 53,000 units will be changed so as not to appear to be the same as Gory Goo. Since Wham has enough excess capacity, management would naturally like to produce and sell the additional units. But there is concern that $450 is below Gory Goo's unit manufacutring costs and well below it's normal selling price, which is set at 40% above unit manufacturing costs. Last year, Gory Goo's unit sales were 380,000 and its total manufacturing costs were: Direct material $342,000 Direct labor 228,000 Variable overhead 304,000 Fixed Overhead 1,330,000 Total manufacturing $2,204,000 In addition to the manufacturing costs, there were selling and administrative expenses associated with Gory Goo. Variable selling and administrative expenses were $1.60 per unit, and fixed selling and administrative expenses were $171,000. For the special order, unit variable manufacturing costs are expected to be the same as they were last year, and fixed manufacturing costs are not expected to increase. Fixed selling and adminstrative expenses are also not expected to increase, but because the special order units are being sold directly to the J-Mart chain, variable selling and administrative expenses are expected to be only $0.90 per unit. Even though the special order units will have a different name and packaging, Wham's marketing group still believes that approximately 7,000 units from the special order will be sold to customers who would normally purchase Gory Goo from Wham. The group also believes that J-Mart has no other source for the Gory Goo product. REQUIRED If Wham accepts the offer from J-Mart, what will be the effect on firm profits?