Amount of raw materials and blue-collar labor

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A firm produces one million units per year. The overhead costs (building maintenance, CEO salary, head office personnel, etc.) come to $1 million per year. The direct costs (raw materials and blue-collar labor) are $1 per unit, so $1 million per year. This means that the total costs for the firm are $2 million, and the average cost per unit of output is $2. The firm sells the units at a price of $2.20 per unit, so it makes $200 thousand per year in profit. The director of marketing has just received an order for an addition 1 million units per year at a price of $1.30 per unit. The firm could satisfy the order by adding a second shift, so no additional overhead. The firm would have to double the amount of raw materials and blue-collar labor. Should the firm accept the order? Please explain.

Reference no: EM132542196

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