Answer: The offer should be rejected.
Explanation:
Given the following :
Total units produced = 1,700,000 units
Total cost = $791,000
Total fixed cost = $486,000
5% increase in production = (0.05 × 1,700,000) = 85,000
Units required by customer = 50,000 ( it is still within range without incurring additional fixed and variable cost).
Hence, total variable cost :
Total cost - total fixed cost
$(791,000 - 486,000) = $305,000
Variable cost per unit :
Total variable cost / total units produced
$305,000 / 1,700,000
= $0.179
Variable cost = marginal cost (Since variable cost per unit will be unchanged).
Offered price = $0.165
$0.165 < $0.179
Since offered price < marginal cost ; The offer should be rejected.
