Question

Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. On this information alone, should Micro accept the offer?

Answer 1

Answer:

The offer shall be accepted.

Explanation:

Provided details, we have

Monthly capacity of production = 10,000 widgets

Actual production = 9,000 units

Where average cost per unit = $5

therefore total cost = 9,000 $\times$ $5 = $45,000

Fixed cost = $18,000

Variable cost = $45,000 - $18,000 = $27,000

Variable cost per unit = $27,000/9,000 = $3 per unit.

Now even if additional 1,000 units will be produced the cost will increase by 1,000 $\times$ $3 = $3,000.

No additional fixed cost will be incurred.

Since buying price is $4 per unit, thus,

Increase in revenue from such sale = $4 - $3 = $1 per unit for 1,000 units = $1,000.

Thus, the offer shall be accepted.