Plevna Manufacturing makes and distributes small, prefabricated homes in kits. The kits contain all the pieces needed to assemble the home and all that is required is the builder erects the home on a foundation.
The variable cost to make each kit is $30,000 and the selling price per kit is $40,000, with variable selling and distribution costs averaging about $5,000 per home.
Currently the company is operating at capacity, which is dictated by the machinery in the manufacturing division. Each kit requires about 10 hours of machine time, and the total available machine time is 5000 hours per year.
Plevna Manufacturing is currently making and selling 500 kits a year. Increasing the plant capacity in the foreseeable future is not a viable option.
Willie Scott is the company's salesperson. Willie has recently been approached by a number or times by people wanting to buy cottages to erect on recreational properties. The cottages would be made by modifying the existing home product. The modification process would begin with a completed home kits. The manufacturing division would then incur additional materials and labour costs of $3000. And three hours of machine time to convert a home kit into a cottage kits. The variable selling and administrative costs associated with each cottage kit are estimated as $4000 in addition to the $5,000 cost of the regular kit.
The most recent company to approach Willie for these cottages, Amour Inc., has proposed a purchase price of $49,500 for 50 cottages.
Required:
What is the net advantage or disadvantage of Plevna Manufacturing accepting the offer from Amour Inc?
List 2 qualitative reasons that Plevna might consider in accepting or declining this offer from Amour Inc.
