EXERCISE 8-21 (CONTINUED)

7. While the company apparently incurred a loss on its business with Shen-

zen Enterprises, caution must be exercised. The green margin on the

business was $1,200. Advanced Products Corporation really incurred a

loss on this business only if at least $1,200 of the yellow and red costs

would have been avoided if the Shenzen Enterprises order had been re-

jected. For example, we don’t know what specific costs are included in

the “Other overhead” category. If these costs are committed fixed costs

that cannot be avoided in the short run, then the company would been

worse off if the Shenzen Enterprises order had not been accepted.

Suppose that Shenzen Enterprises will be submitting a similar order

every year. As a general policy, the company might consider turning

down this business in the future. Costs that cannot be avoided in the

short run, may be avoided in the long run through the budgeting proc-

ess or in some other manner. However, if the Shenzen Enterprises busi-

ness is turned down, management must make sure that at least $1,200

of the yellow and red costs are really eliminated or the resources repre-

sented by those costs are really redeployed to the constraint. If these

costs remain unchanged, then the company would be better off accept-

ing the Shenzen Enterprises business in the future.

Problem 8-22 (60 minutes)