The company may increase production to yield more profit. As mentioned, Pecos has the capacity to produce 20,000 units. The $ 300 wholesale price can still be reduced if production is higher than 10,000 units because fixed cost remains constant regardless of its production. This means that fixed cost per unit decreases as volume increases and net income also increases.

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Selling Price per unit must be regularly reviewed and evaluated. Base on Paul’s actual production of  11,000 units, fixed cost is reduced by $ 4.10/ unit which is 9% lower than what Lester Ledger has computed, so therefore, the minimum wholesale cost can also be lowered to $ 295/unit ( $245.90 x 120%) without decreasing net profit. Likewise, the 300 units order of Sam Smoothtalk can be accepted.

EVALUATE PAUL PECOS’ REACTION TO MS. GOODPERSON’S SALE

The 700 units order from a new distributor is really advantageous to the company because it will increase the net income of Pecos Printers, Inc. for the reason that whether they accept the order or not, the fixed overhead cost of $450,000/yr will remain the same. To wit :

Pecos Printers, Inc. must utilize their maximum capacity by producing more units ( up to 20,000 units) because doing so would yield more profit. Increased production units will mean decrease in Fixed Overhead Cost per unit resulting to increase in Net Income. Likewise, if  cost/unit decrease, selling price per unit (20% mark-up on manufacturing cost) will also decrease which is the main concern of Pecos – to keep the retail price below the industry top.

REFERENCE :

Anthony, R.,Reece, J. & Hertenstein, J.(1995). Accounting: Text and Cases (9th ed.).Chicago : Irwin publishing. PP 51-60.

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