As the company has the capacity to produce 20,000 units in a year, Paul Peco should focus on utilizing the firm’s maximum production capacity, as there is a high level of demand for the product.
Pecos has the capacity to manufacture 20,000 units per year without any increase in the fixed costs. The most profitable solution for Paul Peco would be to sell 20,000 units in a year, so that the company’s maximum capacity is utilized. From this volume, the contribution required from a single unit to cover the fixed costs can be computed (Weston and Copeland).
The profit margin originally set by Paul Peco was a minimum of $ 10 per unit. In the revised plan, a minimum profit of $ 12.50 per unit is fixed. Hence the revised minimum selling price is at $ 280 per unit.
It is evident that Paul Peco would have sold 1,925 units in the last month. Assuming a constant demand every month, Paul Peco will easily be able to sell 20,000 units in the first year. The last month’s contribution margin income statements for the two rules are presented below.
From the revised plan, it is evident that Ms. Goodperson’s decision to accept the contract at $290 per unit was profitable. Ms.Goodperson should be hired again. Also, based on the revised decision rule, Paul Peco should instruct his sales staff to accept orders at any price above $ 280 per