The Morris Company Manufactures Wiring Tools

Essay

The Morris Company manufactures wiring tools. The company is currently producing well below its full capacity. The Baker Company has approached Morris with an offer to buy 5,000 tools at $17.50 each. Morris sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed costs.
Required:
a. If Morris were to accept Baker's offer, what would be the increase in Morris' operating profits?
b. Assume that Morris is operating at full capacity. If Morris were to accept Baker's offer, what would be the change in Morris' operating profits?