If the management expects the revenue to be $700000, then it must not accept the proposal of the landlord as this will increase the annual rent payment to $45500 which is more than the fixed annual rent of $40000.
The company can accept the order as this will result in a profit of $400000. This is because the fixed costs remain fixed irrespective of the size of production (National Council on Economic Education, n.d.; Mankiw, 2008, P274).
If the order size is 12000 units, the company must not accept the offer as this will result in a loss of $492000. The company has to spend an additional amount of $900000 as fixed costs because of an increase in the total capacity. This is because the fixed costs increase with the increase in the total capacity of the business
The maximum order size that the company can accept is 100000 units. This is because beyond this capacity the fixed cost of the company doubles. For producing even one unit beyond the total capacity the company has to incur the total amount of fixed expense as this cannot be adjusted with the number of units produced.
The costs have been allocated as direct and indirect costs. Direct costs include the cost of materials and labor cost that can be directly related to the product whereas indirect costs are the costs that cannot be directly identified with the product. The costs relating to general services are apportioned based on sales volume and the costs of the computer department are allocated based on the use. From this the operational income of the Tree division has been calculated as $480000. The net investment of the division is $1600000. This gives a return of 30% on the investment.
The performance evaluation can be done using Variance analysis, EVA and return earned on investment. To earn profits the business has to be managed efficiently. ROI is an important tool for evaluating the