1. Suppose your company contemplates building a factory to produce seats for BMW X7 automobiles. The factory can make up to 400 seats per year at an average variable cost of $5 per unit. You finance the construction of your factory with a mortgage from a bank that requires an annual payment of $4,000. The loan payment of $4,000 thus represents your annualised cost of investment in this plant. Assume that if BMW defaults, the second-best alternative is to modify your seats and sell them to other car makers at $18 per unit. However, you have to incur additional modification costs of $7 per seat.
2. If BMW agrees to purchase the 400 seats at a price of $20 per unit, what is your company's rent?