This was the wrong decision because she did not consider the fact that despite lower operating profits, Lemon Crme enjoyed higher contribution margin than Real Mint i.e. 0.94 while Real Mint had the contribution margin of 0.64. The right decision should have been that the production of Lemon Crme should continue with the same quantity and its production should not be cut off. The bulk order should be accepted by reducing the current production of Real Mint.
1. If the price offered for the Real Mint is low causing decline in the operating profit OR the price per unit offered can not offset the variable and fixed cost incurred on the production. In the current case, the price per unit of $1.12 is generating the operating profit of $580,000.
2. If the production unit offered for the Real Mint is very high, in other words, in order to produce the required quantity of Real Mint, the production of Lemon Crme should be cut off to its actual position. In that case, the offer should be rejected, as the current price offered per unit is relatively very low than the price of the Lemon Crme and acceptance of the order, will result in the overall lose of operating profit.
If the breakeven volume of Lemon Crme cookies in this new plant is 650,000 packs then she should not accept to buy the new unit. There are several reasons for that. ...