The cost statement of a product is furnished below
The above figures are for an output of 50,000 units. The capacity for the firm is 65,000 units A foreign customer is desirous of buying 15,000 units a price of Rs.20 per unit.
Advise the manufacturer whether the order should be accepted, what will be your advise if the order were from the local merchant?
The acceptance of the order is mainly based on the two important covenants viz Additional cost and Additional revenue.
If the additional demand of the foreign buyer is able to generate the additional revenue more than the additional cost of the operations, the firm should have to accept the foreignorder.
Decision criteriaMarginal/Additional cost for the additional order of 15,000 units.
The acceptance of the order will generate marginal profit of Rs.30,000 which should be accepted. The fixed portion of the factory and selling overheads were already met out which should not be included again in the computation of the marginal or additional cost of the foreign order placed by the business enterprise.
Instead, If the firm accepts the local order at the rate of Rs.20 which automatically will spoil the relationship with the very good customers who regularly purchase at the rate of Rs.24. This will lead to cannibalization of the existing pricing strategy.
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