Micro Enterprises has the capacity to produce 10,000 widgets a month,and currently makes and sells 9,000 widgets a month.Widgets normally sell for $6 each,and cost an average of $5 to make,including fixed costs.The monthly fixed costs are $18,000.Coyote Corp.has offered to buy 1,000 widgets at $4 each. What is the "cost" per unit in the context of evaluating the offer from Coyote Corp.? A)$2 B)$3 C)$4 D)$5 E)$6

Question

Quizplus · Accepted Answer

The cost per unit includes both variable and fixed costs. In this case, the variable cost per unit is $5 since it costs an average of $5 to make each widget. However, the fixed costs also need to be factored in to get the true cost per unit. The total fixed costs of $18,000 divided by 9,000 units equals $2 per unit in fixed costs. So the total cost per unit is $5 (variable cost) + $2 (fixed cost) = $7.

Since Coyote Corp. offered to buy 1,000 widgets at $4 each, selling these widgets would result in a loss of $3 per unit ($7 cost per unit - $4 selling price per unit). Therefore, it is not a profitable deal and S1U1B0Micro Enterprises should not accept the offer.

Micro Enterprises Has the Capacity to Produce 10,000 Widgets