Pretty Dolls Pty Ltd usually sell 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 generate revenue of 7,500 x $29 = $217,500. The variable cost per unit is $20, so the total variable cost for 7,500 units would be $150,000. The total contribution from this order would be $67,500 ($217,500 - $150,000).

The contribution per unit is $29 - $20 = $9, which would contribute towards covering the annual fixed costs of $30,000. Therefore, by accepting the offer, Pretty Dolls would make a $9 per unit contribution towards the fixed costs and generate an additional profit of $67,500. This would be the best decision for Pretty Dolls, as it would increase their profits and help them clear their excess stock.

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