Question
A firm produces one million units per year.The overhead costs (building maintenance, CEO salary, head office personnel, etc.) come to $1 million per year.The direct
A firm produces one million units per year.The overhead costs (building maintenance, CEO salary, head office personnel, etc.) come to $1 million per year.The direct costs (raw materials and blue-collar labor) are $1 per unit, so $1 million per year.This means that the total costs for the firm are $2 million, and the average cost per unit of output is $2.The firm sells the units at a price of $2.20 per unit, so it makes $200 thousand per year in profit.The director of marketing has just received an order for an addition 1 million units per year at a price of $1.30 per unit.The firm could satisfy the order by adding a second shift, so no additional overhead.The firm would have to double the amount of raw materials and blue-collar labor.Should the firm accept the order?Please explain.
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