a) The financial analysis determining the acceptance of the special order is as follows:
Data and Financial Analysis:
Capacity of photocopier per hour = 1,800 copies
Practical capacity of equipment = 7 hours
Total copies in a day = 12,600 (1,800 x 7)
Steady demand per day = 10,000
Variable cost per copy = $0.22
Service price per copy = $0.25
Profit per copy = $0.03 ($0.25 - $0.22)
Normal profit based on steady demand of 10,000 = $300 ($0.03 x 10,000)
Profit based on maximum capacity of 12,600 = $378 ($0.03 x 12,600)
Price per copy for the special customer = $0.24
Profit per copy based on special price of $0.24 = $0.02 ($0.24 - $0.22)
Profit from special customer with 5,000 pages = $100 (5,000 x $0.02)
Profit from other probable customers = $228 (7,600 x $0.03)
Lost profit for accepting special order based on maximum capacity = $50 ($378 - $228 - $100)
Lost profit if order is <u>not accepted</u> and demand is only 10,000 copies = $78 ($378 - $300)
- Therefore, the special order at $0.24 should be accepted.
b) The largest order from customer that the shop could accept = 5,000 + $50/$0.02
= 5,000 + 2,500
= 7,500 copies
Thus, if the customer orders 7,500 copies to be made, the shop can still realize a maximum profit of $378 by accepting orders for additional 5,100 (12,600 - $7,500) copies from others.
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