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Determing Production Output Costs

You are the general manager of a firm that manufactures personal computers. Due to a soft economy, demand for PCs has dropped 50 percent from the previous year. The sales manager of your company has identified only one potential client, who has received several quotes for 10,000 new PCs. According to the sales manager, the client is willing to pay $650 each for 10,000 new PCs. Your production line is currently idle, so you can easily produce 10,000 units. The accounting department has provided you with the following information about the unit (or average) cost of producing three potential quantities of PCs (see attached file). Based on this information, should accept the offer to produce 10,000 PCs at $650 each? Explain.

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When a plant has excess capacity it should utilize that excess capacity as long as the revenue per unit is higher than the variable costs per unit. By doing this the difference between the revenue per unit and the variable costs ...

Solution Summary

This solution analyzes the production costs and the acceptance of an order. It looks at the marginal revenue and variable costs to come up with an optimal decision.