Inland Steel produces cold rolled sheet steel that is sold to auto and appliance companies.Inland sells 14 large shipments of steel to Ford Motor per month at a price of $500,000 per shipment.The head of purchasing at Ford reports that Ford plans to reduce its purchases unless Inland cuts its price.Specifically, Ford says that if the price of $500,000 is maintained, it will reduce its orders to 12 shipments per month.As an alternative to this, Ford suggests that the price be reduced to $480,000 per shipment, and states that if this is done then it will guarantee the current level of 14 purchases per month.

To plan your response to Ford, you realize that you need information about the marginal cost of production and distribution.You talk to two people in the company.Maxwell Smart in financial control estimates that marginal cost is $465,000.He cautions, however, that this depends on how many shipments are made. He says that if output increases, the marginal cost will be lower because the immense fixed costs at Inland would be spread over more units of output.Barney Fife in production says the marginal cost is between $350,000 and $400,000 depending on output per month.He says the rate of output affects overall efficiency and labor costs.

a) In comparing the information about marginal costs, you quickly decide to ignore one of the estimates.Which one do you ignore?Why?

b) After further study you decide to use $400,000 as your estimate of marginal cost.Should you accept Ford's offer to continue buying 14 units per month at a price of $480 thousand?Or should you say, "No thanks, we will just sell you 12 units at $500 thousand."Explain.