Lori approaches Pedro about creating a special wine for her daughter's upcoming wedding. Lori will buy 50 bottles of Pedro's wine, but the order will have fixed costs for special labeling and delivery of $300. Pedro wants to go into the negotiations with Lori knowing the minimum price he can charge per bottle and not lose money on the order. What is that minimum price?

Question

Business

Evony

4 January, 21:51

Lori approaches Pedro about creating a special wine for her daughter's upcoming wedding. Lori will buy 50 bottles of Pedro's wine, but the order will have fixed costs for special labeling and delivery of $300. Pedro wants to go into the negotiations with Lori knowing the minimum price he can charge per bottle and not lose money on the order. What is that minimum price?

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Answers (1)

Know the Answer?

Skye Wheeler · Answer 1

The minimum price will be $[ ($300/50) + x] per bottle or $ (6 + x) per bottle with x is the total variable cost plus avoidable fixed costs (fixed costs besides special labeling and delivery which will not incur if these special wine bottles not produced) it takes Pedro to produce one bottle of special wine for Lori.

Explanation:

To not lose money in this case, Pedro has to charge a minimum price per bottle that equals to the sum of: 1. fixed cost incurred in special labeling and delivery process allocated to one bottle (as stated in the Answer is $300/50 = $6), 2. other avoidable fixed costs (fixed costs which will not incur if these 50 special wine bottles not produced) allocated to one bottle of special wines besides the fixed cost stated in (1), 3. variable costs incurred to the production of one bottle of special wine.