Reference no: EM133502677
Question: You overheard two students' conversation about pricing after a class: Student 1 - We can drop prices in the short run to cover differential variable and fixed costs. But in the long run, prices must cover all variable and fixed costs.
Student 2 - How is that possible? Shouldn't we always cover all our costs, short-term and long-term?
Required:
Write an appropriate response to clarify the pricing concept the students are discussing.
Almond Delites manufactures various types of biscuits. FMF Biscuits Ltd has approached Almond Delites with a proposal to sell the company its top-selling biscuit at a price of $22 000 for 20 000 units. The costs shown are associated with the production of 20 000 units of almond biscuits:
The manufacturing overhead consists of $2 000 of variable costs, with the balance being allocated to fixed costs. Assume that 40% of the fixed costs would be avoidable if the almond biscuits were purchased externally rather than produced internally.
Direct materials $12,000
Direct labour $ 5,000
Manufacturing overhead $ 8,000
Total cost $25,000
Should Almond Delites make or buy the almond biscuit?
What qualitative factors should Almond Delites consider before making its decision?
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