[Jlgoodw727]

1.Ingham Inc. has the capacity to produce 10,000 fax machines per year. Ingham currently produces and sells 7,000 units per year. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from Ingham for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-sustaining costs are $50,000 and $65,000, respectively.

a)What is Ingham's current net income?

b) Should Ingham accept the special offer?

this question deals with relevant costs and I think I know how to set up the first part(a)

Revenue 7000 X 100= $700,000
Expenses
Unit level DL: 15 X 7,000= $105,000
Unit level DM: 40 X 7,000= $280,000
Product level and facility sustaining costs: $50,000 + $65,000= $115,000

Net Income: $200,000 Profit

My question is when considering the offer, is it correct to ignore the product level and facility sustaining costs, because they are fixed. Should I not include that cost are part a's net income at all?

[paraclete]

What you have here is an opportunity profit of $10,000. The fixed costs are, it is assumed, already absorbed by existing turnover.

So two questions,

Will this deal displace existing turnover?

Can you afford the potential that that a deal like this will force down pricing in the market place?