1. Ingham Inc. has the capacity to produce 10,000 fax machines per year. Ingham currently produces and sells 7,000 units per year. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from Ingham for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-sustaining costs are $50,000 and $65,000, respectively.
a)What is Ingham’s current net income?
b) Should Ingham accept the special offer?
2. Based on the segment income statement below, Sorbet is considering eliminating its Mango line.
Revenue from Mango sales $500,000
Salaries for Mango workers (100,000)
Direct material (300,000)
Sunk costs (equipment depreciation) (75,000)
Allocated company-wide facility-sustaining costs (50,000)
Net loss $ (25,000)
Identify each cost as being relevant or not relevant in this decision.