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)
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