Question

A special order to purchase 11,000 arc printers has recently been received from another company and Zena has idle capacity to fill the order. Zena will incur an additional $3 per printer for additional labor costs due to a slight modification the buyer wants made to the original product. One-third of the manufacturing overhead costs is fixed and will be incurred no matter how many units are produced. When negotiating the price, what is the minimum selling price that Zena should accept for this special order

Answer 1

Answer:

Minimum Selling Price = $3

∵ MR = P , MR ≥ MC (for sale).  ∴ P ≥ MC

Explanation:

Special Order of 11000 arc printers has been recently received by Zena. Additional (marginal) cost per printer = $3 , needed for new product. Fixed manufacturing cost is constant irrespective of production level.

Price equal to Marginal Cost is the minimum condition for seller (Zen) to sell. As; in case of constant prices, price is equal to Marginal (additional) Revenue per unit sale. And, Marginal Revenue should be more than or at least equal Marginal cost to incentivise sale. If Marginal revenue from increased output unit is less than its marginal cost, the sale of that unit is loss making, & wont be done.