WPC has excess production capacity and is considering the possibility of making and selling paging equipment. The following estimates are based on a production and sales volume of 1,000 pagers. Unit level manufacturing costs are expected to be $20. Sales commissions will be established at $1 per unit. The current facility level costs, including depreciation on manufacturing equipment ($80,000), rent on the manufacturing facility ($60,000), depreciation on the administrative equipment ($9,375), and other fided administrative expenses ($65,750), will not be affected by the production of the pagers. The chief accountant has decided to allocate the facility level costs to the existing product and to the new product (pagers) on the basis of the number of units of product made (10,000 components and 1,000 pagers).
A) Assuming the pagers could be sold at a price of $40 each, should WPC make the pagers?
B) One of WPC’s sales representatives receives a special offer to sell 1,500 components at a price of $65. should the offer be accepted?
C) WPC has the opportunity to purchase the component that it currently makes. The components can be purchased at a price of $76 each. Assuming the manufacturing equipment has a zero market value, should WPC buy the components?
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