Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company
Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for a plastic injection molding machine (which can be sold for $2.0 million) and $100,000 in plastic injection molds specifically for the toy (not valuable to anyone else). Labor and the cost of materials necessary to make each truck is about $3. This year, a competitor has developed a similar toy that has significantly reduced demand for the toy truck. Now, the original manufacturer is deciding whether they should continue production of the toy truck. If the estimated demand is 100,000 trucks, what is the breakeven price for the toy truck? Should you shut down?
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The break even price is equal to the average avoidable cost of producing the trucks The …View the full answer
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