Assignment
(Decisions under Capacity Constraints) Harrison Products' capacity is 20,000 units of Product J per year. A summary of operating results for last year is as follows:
Sales (12,000 units @ $100) Variable costs Contribution margin Fixed costs
Net operating income
$1,200,000
588,000
612,000
245,000
$367,000
A foreign distributor has offered to buy a guaranteed 8,000 units of Product J at $95 per unit next year. Harrison expects its regular sales next year to be 15,000 units.
a. If Harrison accepts this offer and foregoes some of its expected sales to ensure that it does not exceed capacity, what would be the total operating profit next year, assuming that total fixed costs increase by $100,000?
b. If Harrison can use the extra capacity not needed for its regular sales of 15,000 of Product J to produce 5,000 of Product K, which can be sold for $125 each with a variable cost of $45 and additional fixed costs of $80,000, should Harrison produce the new product, accept the offer from the foreign distributor, or just produce the regular 15,000 units of Product J per year?