In the past, prices have been set by allocating the fixed operating cost to products on the basis of estimated sales in tonnes.

The Ayayai 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:

Material EstimatedProduct Cost SalesSuper Premium $10.75 2,000 tonnesPremium  9.00 2,800 tonnesEconomy  8.00 5,000 tonnes

The fixed cost of operating the machinery used to package all three products is $10,100 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 Ayayai has received an offer from a foreign firm for 900 tonnes of the premium-grade feed. Sales to the foreign firm would not affect domestic sales but would require a $1,800 increase in fixed production costs.

(c) Using only quantitative information, what is the minimum price that the Ayayai’s managers should be willing to accept from the foreign firm?

 

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