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3 March, 19:34

The Metal Shop produces 2.1 million metal fasteners a year for industrial use. At this level of production, its total fixed costs are $320,000 and its total costs are $522,000. The firm can increase its production by 5 percent, without increasing either its total fixed costs or its variable costs per unit. A customer has made a one-time offer for an additional 50,000 units at a price per unit of $0.08. Should the firm sell the additional units at the offered price? Why or why not? a. Yes. The offered price is less than the marginal cost. b. Yes. The offered price is equal to the marginal cost. c. Yes. The offered price is greater than the marginal cost. d. No. The offered price is less than the marginal cost. e. No. The offered price is greater than the marginal cost.

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  1. 3 March, 23:09
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    d. No. The offered price is less than the marginal cost.

    Explanation:

    Current production level = 2,100,000 units

    Increase of 5% = 2,100,000 X 5% = 105,000 units

    Within this limit no additional fixed cost will be incurred.

    Current fixed cost up to this limit of production will be static.

    Variable cost per unit at current level = $522,000 - $320,000 = $202,000

    Current variable cost per unit = $202,000/2,100,000 units = 0.096

    Additional order of 50,000 units at price of $0.08 per unit will not even recover the marginal cost per unit by $0.096 - 0.08 = $0.016

    Loss on 50,000 units = $0.016 X 50,000 = $800

    Therefore the order shall not be accepted.

    Final Answer

    d. No. The offered price is less than the marginal cost.
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