A firm has excess capacity, and has received an order for 50 000 units at $20 each over and above its normal production activity of 600 000 units. To meet this order, new equipment at a cost of $200 000 would have to be bought, and this equipment would have to be scrapped after the order had been filled. The firm currently sells for $50 per unit, has variable costs of $15.80, and fixed costs of $600 000. Assuming the firm had been aggressively seeking the business of the customer who requested the special order, what would be the minimum price that the firm would be prepared to charge?

Question

Quizplus · Accepted Answer

The minimum price that the firm would be prepared to charge is the variable cost per unit, which is $15.80. This is because the firm has excess capacity, and so the only additional cost that it will incur in producing the additional units is the variable cost.

A Firm Has Excess Capacity, and Has Received an Order