Supply/demand and where cost analysis applies
Business AB makes Keyboards for laptop computers for sales to computer manufacturers (OEMs).
Account information shows the total cost of producing four potential quantities of keyboard:
Quantities of keyboard
50,000 100,000 150,000 200,000
Materials $ 125,000 $ 250,000 $ 375,000 $ 500,000
Leasing of Machinery 900,000 900,000 900,000 900,000
Labor 5,000 10,000 15,000 20,000
Total costs $1,030,000 $1,160,000 $1,290,000 $1,420,000
There is market saturation, sales has only identified one potential purchaser as result.
This customer has numerous alternative options and as a result is only willing to pay $5 per keyboard for an order of 100,000 keyboards.
Is it better to sign contract under these terms or cease operations?
a. In the short run, would you sign the contract or shut down? Answer YES or NO and give reason.
b. In the long run, would you sign the contract or shut down? Answer YES or NO and give reason.