Aerotoy Company Makes Toy Airplanes

question 7

Multiple Choice

Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied. Costs per plane are as follows: No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be accepted?

• A) Yes, income will increase by $300.
• B) No, income will decrease by $180.
• C) No, income will decrease by $1,500.
• D) Yes, income will increase by $180.
• E) It doesn't matter; there will be no change in income.

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Definitions:

Total Variable Cost

The sum of all variable costs (costs that change with the level of output) involved in producing a particular quantity of output.

Average Variable Costs

The total variable costs (costs that change with the level of output) of production divided by the quantity of output produced.

Best Combination

The optimal mix of goods or strategies that maximizes satisfaction or utility given constraints like budget or resources.

Inputs

Resources such as labor, materials, and capital that are used in the production process to create goods and services.