Question

Stavos Company’s screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen is:

  

Variable cost per screen	$	118
Fixed cost per screen		31	*
Total cost per screen	$	149

*Based on a capacity of 840,000 screen per year.

Part of the Screen Division’s output is sold to outside manufacturers of HDTVs and part is sold to Stavos Company’s Quark Division, which produces an HDTV under its own name. The Screen Division charges $189 per screen for all sales.

The costs, revenue, and net operating income associated with the Quark Division’s HDTV are given below:

Selling price per unit					$	579
Variable costs per unit:
Cost of the screen	$	189
Variable cost of electronic parts		237
Total variable cost						426
Contribution margin						153
Fixed costs per unit						86	*
Net operating income per unit					$	67

*Based on a capacity of 220,000 units per year.

The Quark Division has an order from an overseas source for 5,000 HDTVs. The overseas source wants to pay only $403 per unit.

Required:

1. Assume that the Quark Division has enough idle capacity to fill the 5,000-unit order. Is the division likely to accept the $403 price or to reject it?

	Reject
	Accept

2. Assume that both the Screen Division and the Quark Division have idle capacity. Under these conditions, would it be advantageous for the company as a whole if the Quark Division rejects the $403 price?

Price offered per player
Less variable costs per player:
Screen Division
Quark Division		0
		$0

3. Assume that the Quark Division has idle capacity but that the Screen Division is operating at capacity and could sell all of its screens to outside manufacturers. Compute the profit impact to the Quark Division of accepting the 5,000-unit order at the $403 unit price.

Price offered per player
Less:
Lost revenue from sales of Screen to outsiders
Variable cost of Quark Division

Answer 1

Part-1

Division should likely to reject the order because Offered Price is less than Variable Cost i.e. Offered Price $403 and Variance Cost $426

Part-2
Price offered per player	$403
Less: Variable cost per player
Screen Division	$118
Quark Division	$237
Contribution	$48

Part-3
Price offered per player	$403
Less:
Lost revenue from Screen to Outsiders	$189
Variable cost of Quark Division	$237
Net loss per player	($23)