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A company which manufactures and sells one single product iscurrently operating at 85% of full capacity, producing 102,000 units permonth. The current total monthly costs of production amount to £330,000, of which £75,000 are fixed and are expected to remainunchanged for all levels of activity up to full capacity.
A new potential customer has expressed interest in taking regularmonthly delivery of 12,000 units at a price of £2.80 per unit.
All existing production is sold each month at a price of £3.25 perunit. If the new business is accepted, existing sales are expected tofall by 2 units for every 15 units sold to the new customer.
What is the overall increase in monthly profit which would result from accepting the new business?First of all, I already watch your free lectures. However, I still found myself getting confused when I work on questions regarding opportunity cost. In this question, I know that FC should be ignored and the VC is 2.50 per unit. If we accept the new business, we will generate 12,000 x 0.30 = 3,600. I don’t have problem with this one. If we don’t accept the new business, according to the answer, 1600 x $0.75 = $1200. I’m confused shouldn’t it be (12,000 units-1,600 units)x$0.75?
Accepting the new business means that existing sales will fall by 2 units for every 15 units of new sales. So the fall in sales will be 2/15 x 12,000 = 1,600. If they don’t accept the new business then instead they will sell 1,600 on the normal basis.
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