Order Point Ltd Manufactures Componentry Used in the Production of Computers

question 71

Multiple Choice

Order Point Ltd manufactures componentry used in the production of computers. The units can be purchased for $50 each from an outside vendor. It costs the manufacturer $60 per unit to produce them, of which 25% is fixed overhead cost. What are the relevant costs for this decision? Based on these costs, which option should the company choose? $\begin{array} { lcc }&\text {Relevant Costs}\\&\underline{\text{(Manufacture and Purchase) }}&\underline{\text {Decision}}\\ \text { i. } & \$ 50 \text { and } \$ 45 & \text { Manufacture } \\ \text { ii. } & \$ 50 \text { and } \$ 45 & \text { Purchase } \\ \text { iii. } & \$ 45 \text { and } \$ 40 & \text { Purchase } \\ \text { iv. } & \$ 45 \text { and } \$ 40 & \text { Manufacture } \end{array}$

• A) i
• B) ii
• C) iii
• D) iv

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Definitions:

Perfectly Competitive Industry

A Perfectly Competitive Industry is characterized by many sellers and buyers, free entry and exit, and a product that is identical across suppliers, leading to no single entity having market control.

Marginal Cost

The additional cost of producing one extra unit of a good or service.

Total Revenue

The total amount of money a company receives from selling its goods or services before any expenses are subtracted.

Profit-Maximizing Output

The point of production where a company reaches its maximum profit, occurring when marginal revenue is equal to marginal cost.