Answer to Question #98048 in Macroeconomics for Mensah Godfred

Answer to Question #98048 in Macroeconomics for Mensah Godfred


Question #98048

You are the general manager of a firm that manufactures personal computers. Due to
a tough economy, demand for PCs has dropped 50 percent from the previous year. The
sales manager of your company has identified only one potential client, who has
received several quotes for 10,000 new PCs. According to the sales manager, the client
is willing to pay $800 each for 10,000 new PCs. Your production line is currently idle,
so you can easily produce the 10,000 units. The accounting department has provided
you with the following information about the unit (or average) cost of producing three
potential quantities of PCs:
10,000 PCs 15,000 PCs 20,000 PCs
Materials (PC component) $600 $600 $600
Depreciation 300 225 150
Labor 150 150 150
Total unit cost $1,050 $975 $900
Based on this information, should you accept the offer to produce 10,000 PCs at $800
each? Explain.

Expert’s answer

Average variable cost for one unit Material cost +l Labor cost The firm faced by produce 1 PC the average variable cost is $750 Price for one unit $800In short-run , a firm’s total costs can be divided into fixed costs, which a firm must incur before producing any output, and variable costs, which the firm incurs in the act of producing. In the short term, the business will operate as long as the price charged by the business per PC unit is greater than or equal to the average variable cost. As the firm will accept the offer to produce 10,000 computers at $ 800 each. The company will be able to add , or $ 50 per PC and per unit, from the sale of 10,000 PCs to a total of $ 50,000.

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