Mountain Gear can manufacture mountain climbing shoes for $22.36 per pair in var

Question

Mountain Gear can manufacture mountain climbing shoes for $22.36 per pair in variable raw material costs and $11.46 per pair in variable labor costs. The shoes sell for $97 per pair. Last year, production was 170,000 pairs and fixed costs were $1.18 million. The maximum production level for the firm given its current assets is 200,000 pairs. What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 15,000 pairs?

Mountain Gear can manufacture mountain climbing shoes for $22.36 per pair in variable raw material costs and $11.46 per pair in variable labor costs. The shoes sell for $97 per pair. Last year, production was 170,000 pairs and fixed costs were $1.18 million. The maximum production level for the firm given its current assets is 200,000 pairs. What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 15,000 pairs?

Explanation / Answer

Answer - $507300

Reason - minimum variable cost of acceptance would be total cost of variable raw material and labour. Fixed cost of $1.18 will be ignore because that will continue to occur irrespective of order is accepted or not.

So minimum acceptable total revenue = 15000 units * (22.36 + 11.46) = $507300

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