Ronco manufactures Bass-O-Matics. Their sales are subject to a downward sloping
(linear) demand function: P(x) = 100 – x. The price that their product brings is a function
of the quantity sold – or conversely – the quantity they can sell is a function of the price
at which they sell the product. x = 100 – P(x). So if they set the price at $70 per unit,
they can sell 30 units; if they set the price at $50 per unit, they can sell 50 units, and so
forth. They are currently producing and selling at capacity, which is 35 units.
Suppose they are approached by Bed, Bath, and Beyond with an order for 10 Bass-OMatics. Their variable costs are $10 per unit. What is the minimum price that they
should consider for this order?
Suppose that they can buy a new machine and increase capacity by 10 units. Ignoring the
special order, how much should they be willing to pay to increase machine capacity from
35 to 45?
Silver Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfill a
large one-time-only special order for a product similar to one offered to regular
customers. The following per unit data apply for sales to regular customers:
Direct materials
Direct labor
Variable manufacturing support
Fixed manufacturing support
Total manufacturing costs
Markup (60%)
Targeted selling price
$100
125
60
75
360
216
$576
Silver Lake Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry
rather than oak, so direct material costs will increase by $30 per unit.
Required:
a.
b.
For Silver Lake Cabinets, what is the minimum acceptable price of this onetime-only special order?
Suppose that Silver Lake has capacity of 10,000 cabinets and is currently
operating at 90% capacity. If the order is for 2,000 cabinets, what is the
minimum acceptable price for the special order?