Reference no: EM132642898
Question - The Splish packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are listed here:
Product Material cost Estimated Sales
Super $10.25 1,800 tonnes
Premium 8.25 3,200 tonnes
Economy 7.00 4,700 tonnes
The fixed cost of operating the machinery used to package all three products is $9,800 per year. In the past, prices have been set by allocating the fixed operating cost to products on the basis of estimated sales in tonnes. The resulting full costs (material costs plus allocated fixed operating cost) are then marked up 100%. The Splish has received an offer from a foreign firm for 1,100 tonnes of the premium-grade feed. Sales to the foreign firm would not affect domestic sales but would require a $2,100 increase in fixed production costs.
Required - Using only quantitative information, what is the minimum price that the Splish's managers should be willing to accept from the foreign firm?
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