A company has some idle manufacturing capacity and produces 2 products AB and MN, whose cost structure
Question:
A company has some idle manufacturing capacity and produces 2 products AB and MN, whose cost structure is as follows:
Item Cost $/unit | AB | MN |
Direct materials | 90 | 110 |
MOD | 35 | 48 |
GIF variables | 30 | 36 |
GIF fixed | 40 | 54 |
Total cost | 195 | 248 |
The following 4 offers have been received:
a) Company XYZ offers to buy 9,000 units of AB from you at $170 each and 8,500 units of MN at $220 each.
b) Company DEF requests 12,000 units of AB at $164 each and 10,000 units of MN at $200 each.
c) The company PQR asks for 10,000 units of AB at $172 each and 8,000 units of MN at $205 each.
d) The company TUV has made an offer for 8,600 units of AB at $171 each and 5,800 units of MN at $238 each.
OFFERS/Companies | XYZ | DEF | PQR | TUV |
AB units | 9,000 | 12,000 | 10,000 | 8,600 |
AB Price | 170 | 164 | 172 | 171 |
MN units | 8,500 | 10,000 | 8,000 | 5,800 |
MN Price | 220 | 200 | 205 | 238 |
If the current idle capacity allows serving only one of these offers, which one should be selected? Identify the relevant information to solve the exercise.
Expert Answer:
In order to determine which offer to accept we need to calculate the total revenue and total cost for each offer and then compare the profit margin fo... View the full answer
