Novacar Company manufactures automobiles. The red car division sells
its red cars for $25,000 each to the general public. The red cars have
manufacturing costs of $12,500 each for variable and $5,000 each for
fixed costs. The division’s total fixed manufacturing costs are
$25,000,000 at the normal volume of 5,000 units.
The blue car division has been unable to meet the demand for its cars
this year. It has offered to buy 1,000 cars from the red car division
at the full cost of $13,000. The red car division has excess capacity
and the 1,000 units can be produced without interfering with the outside
sales of 5,000. The 6,000 volume is within the division’s relevant
operating range.Explain whether the red car division should accept the
offer. Support your decision showing all calculations.