Answer:
We need to evaluate the possible gains from selecting one order over the other:
Current costs for JTM:
- $12 variable per unit
- $4 fixed per unit
If JTM proceeds with Firm A's order, its fixed costs will remain unchanged and it stands to gain an additional profit of: ($17 - $12) x 10,000 = $50,000.
However, if JTM opts for Firm B's order with its existing cost framework, it lacks the capacity to fulfill it unless variable or fixed costs rise—though we can’t ascertain by how much. Therefore, the contribution margin would likely be less than the $5 obtainable from Firm A's order.
Alternatively, JTM could accept Firm B's order while foregoing the sale of 2,000 units through standard sales channels. This choice would enhance profits but would also incur a loss of regular profits:
($5 x 14,000 units) - ($6 x 2,000 units for forgone regular profits) = $70,000 - $12,000 = $58,000. If JTM manages to cancel the sale of those 2,000 units, Firm B's proposition would increase profits by $58,000, surpassing Firm A's by $8,000, but this hinges on the feasibility of canceling the routine sales.
