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. Assuming the same story, but Coyote's offer is for 1,500 units (all or nothing), should the offer be accepted?

Answer 1

The order for 1,500 at $4 should be rejected. It will imply omre work for no extra income.

Step-by-step explanation:

First, we need to check for the cost structure of Micro Enterprises

9,000 x $5 average cost = 45,000 total cost

total cost = fixed cost + variable cost

45,000 = 18,000 + 9,000 x variable cost per unit

(45,000 - 18,000) / 9,000 = variable per unit

variable per unit = 3

Now we calculate the the special order

sales revenue for the proposed deal: 1,500 x 4 = 6,000

variable cost for the widget: 1,500 x 3 = (4,500)

opportunity cost:

we resing the contribution for 500 units in the local marke

this units selling price is $6 and their cost is the same $3

500 x (6 - 3 ) = (1,500)

net differencial analysis 0

It should be rejected. as it would not modify the net income

We could prove this by building the incomefor each scenario

if not accepted:

9000 x ( 6 - 3 ) -18,000= 9,000

if accepted:

8500 x (6-3) + 1,500 x (4-3) - 18,000 = 9,000