Pretty Dolls Pty Ltd usually sells 30,000 dolls per annum. This year they have excess stock of 10,000 dolls; they usually retail the dolls at $35 per unit. Their variable cost per unit is $20 and their annual fixed costs are $30,000. They have received 'a one-time-only expression of interest' from an overseas retail chain to purchase 7,500 units at $29 per unit. What would be the best advice you could provide to Pretty Dolls?

Question

Quizplus · Accepted Answer

Accepting the offer would result in a contribution per unit of $9 (selling price of $29 - variable cost of $20), which would cover a portion of the fixed costs of $30,000. Selling the excess stock at a lower price still provides a contribution towards covering fixed costs and reduces the carrying cost of excess inventory. Therefore, accepting the offer would be beneficial to the company.

Pretty Dolls Pty Ltd Usually Sells 30,000 Dolls Per Annum