You are a general manager of a firm that manufactures personal computers. Due to a soft economy, demand for PCs has dropped 50 percent from the previous year. The sales manager of your company has identified only one potential client, who has received several quotes for 10,000 new PCs. According to the sales manager, the client is willing to pay $650 each for 10,000 new PCs. Your production line is currently idle, so you can easily produce the 10,000 units. The accounting department has provided you with the following information about unit (or average) cost of producing three potential quantities of PCs. Based on the information provided, what is your recommendation? Explain.

10,000 PCs 15,000 PCs 20,000 PCs

Materials (PC components) $500 $500 $500

Depreciation $200 $150 $100

Labor $100 $100 $100

$800 $750 $700

Question

Marcelo

Business

5 April, 02:04

You are a general manager of a firm that manufactures personal computers. Due to a soft economy, demand for PCs has dropped 50 percent from the previous year. The sales manager of your company has identified only one potential client, who has received several quotes for 10,000 new PCs. According to the sales manager, the client is willing to pay $650 each for 10,000 new PCs. Your production line is currently idle, so you can easily produce the 10,000 units. The accounting department has provided you with the following information about unit (or average) cost of producing three potential quantities of PCs. Based on the information provided, what is your recommendation? Explain.

10,000 PCs 15,000 PCs 20,000 PCs

Materials (PC components) $500 $500 $500

Depreciation $200 $150 $100

Labor $100 $100 $100

$800 $750 $700

+2

Answers (1)

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Chambers · Answer 1

The order should be accepted based on incremental costs and revenues.

Explanation:

As only relevant costs must be considered, we can not account for depreciation. Furthermore due to slashed market demands, it is not viable to produce more than what is demanded thus calculating the new cost of per computer is as,

PC = Materials + Labor (Only direct incremental costs)

PC = 500 + 100 = $600/pc

This nets a profit per unit of

Profit = 650 - 600 = $50/unit

Thus this order should be accepted and 10,000 units should be produced as incremental costs are less than incremental revenues.