You are the general manager of TU Modems Inc., and your accounting department ha
ID: 1115879 • Letter: Y
Question
You are the general manager of TU Modems Inc., and your accounting department has provided you with the following information about the total cost of producing three potential quantities of a commercial-grade modem: 100,000 Units 150,000 Units 200,000 Units Materials $ 250,000 $ 375,000 $ 500,000 Depreciation $ 900,000 $ 900,000 $ 900,000 Labor $ 10,000 $ 15,000 $ 20,000 Total Costs $ 1,160,000 $ 1,290,000 $ 1,420,000 The market is saturated with modems, and your sales department has been able to identify only one potential buyer of your modems. This customer has numerous options and as a result is only willing to pay $10 per modem for an order of 100,000 modems. You must decide whether to sign a contract under these terms or simply shut down your operations. What is your optimal decision? What if you offer them an additional 50,000 units at a price of $9? What may be your short and long term strategy?
Explanation / Answer
Answer : The company has been producing modem where the table shows information about cost:
11,60,000
Option 1 : If Customer demanded 1,00,000 units at $10 than
Total revenue -= $10,00,000
Total cost = $11,60,000
Loss faced by the firm is $1,60,000
Where as If Firm shut down its operation than they faced a loss of $9,00,000( Deperication).
So the optiumal decision is that firm should accept the proposal and faces a loss of $1,60,000. The firm should sign the contract and atleast covered its fixed cost under these terms and condition.
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IF the person accepted the offer of purchasing additional modem at cost of $9 for 50,000 units than they accept the proposal and our firm gain such as :
Total revenue = $10*1,00,000+$9*50,000 = $14,50,000
Total cost = $12,90,000(Given)
Profit = $1,60,000
Now if this deal is done than the firm gained a profit of $1,60,000.
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Short term strategy are to set the price of the modem at low so that firm covered its cost and generate some profit for survival in the market.
Long term strategy are to create more useage of the product or change technology of producing the product according to the requirement of the customer.
Units Material labour Deperication Total cost 1,00,000 2,50,000 10,000 9,00,00011,60,000
1,50,000 3,75,000 15,000 9,00,000 12,90,000 2,00,000 5,00,000 20,000 9,00,000 14,20,000Related Questions
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