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Fixed Costs and Maximizing Firm Value

Golf Specialities (GS) is a Belgian company which manufacture head covers.
GS is currently making 500 tiger head covers at 3.50 euros, which includes both variables and allocated fixed cost. GS sell to distributors for 4.25 euros. A distributor from Japan (Kojo) wants to purchase 100 tiger head covers per week from GS and sell them in Japan. Kojo offers 2 euros per head cover. GS had enough capacity to produced the additional covers and estimate that if accepts Kojo offer the per unit cost of all 600 head cover will be 3.10. Assume the cost data provided (3.50 euros and 3.10 euros) are accurate estimates of GS's cost of producing the tiger head covers?

1. To maximize the firm value, should GS accept the Kojo offer? Why or why not?
2. Given the data, what is GS weekly fixed cost of producing the tiger head covers?
3. Besides the data provided above, what other factor should GS consider before making the decision.

Solution Preview

Dear Customer,

I have completed the problem with detailed steps.

1. To maximize the firm value, should GS accept the Kojo offer, why or why not?
Current Scenario:
Total Sales = 4.25 * 500 = 2,125
Total Costs = 3.50 * 500 = 1,750
Net Income = ...

Solution Summary

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$2.19