Balance Company produces a single product - an athletic shoe pair. The shoe pair sells for $175
Question:
Balance Company produces a single product - an athletic shoe pair. The shoe pair sells for $175 and has total variable costs of $80. The shoe pair requires 25 minutes of machine time. Production of shoes is constrained by machine capacity. All the available machine time of 2,000 hours is being used to meet current demand. Balance Company has been approached by PriceCo with a request to supply 3,000 pairs of a new shoe.
PriceCo has offered to pay $160 for each new shoe pair. The new shoe pair has an estimated variable cost of $70 and each new shoe pair would require 20 minutes of machine time.
a) What is the opportunity cost of producing each new shoe pair?
b) Balance Company has determined that filling the order for PriceCo will require a special embossing machine that will need to rent. Balance Company can rent the required machine for $6,000. What is the minimum or floor price per unit that Balance Company should accept for the offer to supply this new shoe to PriceCo?
Expert Answer:
a The opportunity cost of producing each new shoe pair is the contribution margin lost from not usin... View the full answer
