A Firm Has Excess Capacity, and Has Received an Order

question 106

Multiple Choice

A firm has excess capacity, and has received an order for 50 000 units at $20 each over and above its normal production activity of 600 000 units. To meet this order, new equipment at a cost of $200 000 would have to be bought, and this equipment would have to be scrapped after the order had been filled. The firm currently sells for $50 per unit, has variable costs of $15.80, and fixed costs of $600 000. Assuming the firm had been aggressively seeking the business of the customer who requested the special order, what would be the minimum price that the firm would be prepared to charge?

• A) $15.80
• B) $50
• C) $27.80
• D) $19.80

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Definitions:

Profitability Ratios

Financial metrics that are used to assess a business's ability to generate earnings in comparison to its expenses and other relevant costs incurred during a specific period of time.

Short-Term Obligations

Liabilities or debt obligations that are due to be paid within a year or less, typically involving operating expenses or short-term loans.

Leverage Ratio

A financial ratio that measures the amount of debt used in a company's financing structure in comparison to its equity or assets.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations.