Answer:
We must analyze the potential benefits of choosing one order or the other one:
Current JTM costs:
- $12 variable per unit
- $4 fixed per unit
If JTM accepts Firm A's order its fixed costs will not vary and it will be able to increase its profits by: ($17 - $12) x 10,000 = $50,000
Since JTM doesn't have the capacity to fulfill Firm B's order with their current cost structure, if it decides to take it, its variable or fixed costs (we don't know which) will probably increase, so its contribution margin will no longer be $5, as with Firm A's order, but will probably be lower. We are not told by how much the costs would increase.
The third alternative is to accept Firm B's offer and not sell 2,000 units through its normal distribution channels, but that would result in an increase in profits but also loss of normal profits:
($5 x 14,000 units) - ($6 x 2,000 units for the lost normal profits) = $70,000 - $12,000 = $58,000. If JTM is able to cancel the sale of 2,000 units, then Firm B's offer would increase its profits by $58,000, $8,000 more than Firm A's order, but it depends on its ability to cancel or not the normal sales.
