Question

The Metal Shop produces 1.7 million metal fasteners a year for industrial use. At this level of production, its total fixed costs are $486,000 and its total costs are $791,000. The firm can increase its production by 5 percent, without increasing either its total fixed costs or its variable costs per unit. A customer has made a one-time offer for an additional 50,000 units at a price per unit of $.165. Should the firm sell the additional units at the offered price? Why or why not?
A :Yes; The offered price is less than the marginal cost.
B: Yes; The offered price is equal to the marginal cost.
C: No; The offered price is less than the marginal cost.
D: Yes; The offered price is greater than the marginal cost.
E: No; The offered price is greater than the marginal cost.

Answer 1

Answer:

C: No; The offered price is less than the marginal cost.

Explanation:

normal production level 1,700,000 units

total fixed costs $486,000

total variable costs $791,000 - $486,000 = $305,000

variable cost per unit = $305,000 / 1,700,000 = $0.179411764 per unit

the special order = $0.165 per unit which is lower than the variable cost per unit (marginal cost), so the special order should be rejected.