problem 5 40 introduction to management accounting 416312

The Valasquez Company, a maker of a variety of metal and plastic products, is in the midst of a business downturn and is saddled with many idle facilities. Columbia Health Crae has appraoached Velasquez to produce 300,000 nonslide serving trays. columbil will pay $1.30 each. Valasquez predicts that its variable costs will be $1.40 each. Its fixed costs , which had been averaging $1 per unit on a variety of other products, wil now be spread over twice as much volume, however. The president commented, “Sure we’ll lose $.10 each on the variable costs, but we’ll gain $.50 per unit by spreading our fixed costs. Therefore, we should take the offer, because it represents an advantage of $.40 per unit.” Suppose the regular business had a current volume of 300,000 units, sales of $600,000, variable costs of $420,000 and fixed costs of $300,000. Do you agree with the president and Why?