Merowak Missiles is proposing to develop its next generation Democratizer Offensive Weapon System II (DOWS II) for the US military. It expects to have to sink $1 billion into R&D and design, spend $0.5 billion building the tools and production facility that are unique to DOWS II production. It houses these in standard factory floor space that is not unique to DOWS II production (and so could be used for whatever purpose). The floor space costs $1 million. Each missile has a marginal cost of $2,000. The Pentagon is considering ordering 1 million of these missiles. What is the average cost per missile that Merowak could bid for the contract?

The average cost per missile that Merowak could bid for the contract is $3,501 per missile

Explanation:

To compute the average cost per missile, we need to apply the formula which is shown below:

The Average cost per missile = Total cost : Quantity

where,

Total cost = Fixed cost + variable cost

The fixed cost is computed by

= $1,000 million + $500 million + $1 million

= $1,501 million

Since the value is given in billion so we converted into million.

And, the variable cost = Marginal cost * floor space cost

= $2,000 * $1 million

= $2,000

So, the total cost = $1,501 million + $2,000 million = $3,501 million

Now put these values to the above formula

So, the value would equal to

= $3,501 : 1 million

= $3,501 per missile