6) New York Liberty Corporation makes miniature statues of the Empire State Buil

Question

6) New York Liberty Corporation makes miniature statues of the Empire State Building from cast iron. Sales total 50,000 units a year. The statues are finished either rough or polished, with an average demand of 60% rough and 40% polished. Iron ingots, the direct material, costs $6 per pound. Processing costs are $300 to convert 30 pounds into 60 statues. Rough statues are sold for $15 each, and polished statues can be sold for $18 or engraved for an additional cost of $5. Polished statues can then be sold for $30.

Required:

Determine whether New York Liberty Company should sell the engraved statutes. Why?

Explanation / Answer

Problem is figured as follows: Marginal cost / additional cost is as given in question which is 5.

Now marginal revenue for engraved statues = Selling price of polished statues with engraving Minus selling price of polished statue without engraving = $30 - $18 = $12

So to answer your question whether new york liberty should sell engraved statue we need only marginal cost of engraving and marginal selling price. all other information are not relevant to this particular decison making scenario.

Since marginal revenue is $12 and marginal cost is $5 so it worthwhile to engrave the statues and sell it will create additional revenue of 12-5 i.e. $7 to new york liberty company.

thanks.

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