Question

Whether this order is profitable or not, would it make sense to accept the order in order to expand into an international market in this scenario?

Scenario:

THE RESILIENTARMOUR Corporation is an American company that manufactures cost-effective protective covers for automobiles made out of innovative composite material, which currently are being sold only in the United States. ResilientArmour currently produces and sells 100,000 protective covers a month and operates its one factory at 60 percent capacity. At that output, the average total cost (ATC) of manufacturing a protective cover is $19.00. Experience has shown that the ATC decreases as output is expanded beyond 100,000 units per month but rises again if output is increased above 125,000 units per month.

THE RESILIENTARMOUR Corporation normally sells its protective covers domestically for $24.00 each. It recently received an order for an additional 10,000 protective covers per month from a buyer in a foreign country where THE RESILIENTARMOUR Corporation would like to do business. This buyer specified that it would pay no more than $14.00 per protective cover. The firm’s accountants estimate that at 110,000 units a month, the ATC of producing a protective cover would be $18.00. THE RESILIENTARMOUR executives want to accept the order.

question: Whether this order is profitable or not, would it make sense to accept the order in order to expand into an international market?

Answer 1

monthly demand	100,000	units
current utilization	60%	of capacity
ATC manufacturing	$                19	per unit
range for decrease in ATC: 100,000 to 125,000 units/month
domestic selling price	$                24	per unit
new order	10,000	units
selling price	$                14	per unit
ATC predicted	$                18	per unit
current sales	$ 2,400,000	per month
current ATC	$ 1,900,000	per month
Total profit	$     500,000	per month
with new order
additional capacity utilization =	6%
sales	$ 2,540,000
cost	$ 1,980,000
profit	$     560,000
hence, This order is profitable.
Resilientarmour can use this order to expand into international markets, as the company has the capacity to accommodate these additional orders.