Question

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 $800 each for 10,000 new PCs. Your production line is currently idle, so you can easily produce the 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:
10,000 PCs 15,000 PCs 20,000 PCs
Materials (PC components) $600 $600 $600
Depreciation 300 225 150
Labor 150 150 150
Total unit cost $1,050 $975 $900

Required:
Based on this information, should you accept the offer to produce 10,000 PCs at $800 each? Explain.

Answer 1

Answer:

Yes I would

Explanation:

We have these costs

Variable cost:

Materials = 600 dollars for each of component.

Labour is at a rate of 150 dollars each

For fixed cost depreciation = 300 dollars

Now we have to calculate the average variable cost

Cost of production of 1 pc + labour price of 1

= 600 + 150

AVC = 750

The sales price for each of the 10000 pc = 800 dollars

Now we can see that price p is greater than or equal to avc. 800 >=750

So the I have to accept to produce these pcs at the rate of 800 for 1 pc.

800-750 = 50

50x10000 = $500000 from the sale of the 10000 pcs