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. On this information alone,should Micro accept the offer? A)No,because it will lose $1 per unit B)No,because it will lose $2 per unit C)No,because it will exceed capacity D)Yes,because it makes $1 per unit in the short run E)Unable to determine

Question

Quizplus · Accepted Answer

Micro Enterprises should accept the offer because the variable cost to produce one widget is $5 minus the fixed cost contribution per unit. Given the fixed costs are $18,000 and the company produces 9,000 widgets a month, the fixed cost contribution per unit is $2 ($18,000 / 9,000). Therefore, the variable cost is $3 ($5 - $2). Selling at $4 each covers the variable cost and contributes $1 per unit towards fixed costs and profit.

Micro Enterprises Has the Capacity to Produce 10,000 Widgets