Question

The Nash packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are listed here: Material Estimated Product Cost Sales Super Premium $ 10.25 2,100 tonnes Premium 8.25 3,200 tonnes Economy 7.00 5,000 tonnes The fixed cost of operating the machinery used to package all three products is $10,300 per year. In the past, prices have been set by allocating the fixed operating cost to products on the basis of estimated sales in tonnes. The resulting full costs (material costs plus allocated fixed operating cost) are then marked up 100%. The Nash has received an offer from a foreign firm for 1,000 tonnes of the premium-grade feed. Sales to the foreign firm would not affect domestic sales but would require a $1,900 increase in fixed production costs. (c) Using only quantitative information, what is the minimum price that the Nash's managers should be willing to accept from the foreign firm? Price for order:

Answer 1

Answert

Price that should be accepted from Foreign Customer

Since Premium Price grade feed Material Cost is $8.25 for 1000 and Extra Fixed cost is $1900

Material cost = $8.25 x 1000 = $8250

Add: Extra fixed cost= $1900

Minimum Price = $10,150

Fixed Cost which Already incurred of $10300 is sunk Cost for decision makingand will not affect decison related to Foreign customer,only costs which is Specifically incurred will be relevant.

Therefore, Minimum Price which should be accepted is $10150.They can accept anything above $10150.

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