A large retail customer made an offer to buy 10,000 units at a special price of $7 per unit. The manufacturer usually sells each unit for $10. Variable manufacturing costs are $5 per unit and fixed manufacturing costs are $3 per unit. For the manufacturer to accept the offer, which of the following assumptions needs to be true?
For the manufacturer to accept the offer, the assumption that needs to be true is that the manufacturer can fulfill the order without expanding the capacities of the production facilities. This is because the variable costs per unit ($5) are less than the special price offered ($7), thus generating a contribution margin of $2 per unit. The fixed costs are irrelevant to this decision as they remain unchanged regardless of the decision. Therefore, as long as the manufacturer has sufficient capacity to take on this additional order without incurring extra costs or expanding facilities, the offer would be favorable.
isnt'it B?
In the current situation, the total cost is 150,000 (70,000 product purchasing costs, 50,000 variable costs, 30,000 fixed costs.). If he sells it for $10, he makes 100,000 in revenue. In other words, there is a sale at a loss for this product. For this reason, the costs of this product must somehow be covered by the sales of other products. No information is given in the question regarding option B. It is not possible to comment on capacity with the information available. It's not really related to what's being asked anyway.