Question

Tennis Town can manufacture tennis rackets for $39.75 each in variable raw material costs and $30.35 per racket in variable labor expense. The rackets sell for $180 each. Last year, production was 100,000 rackets. Fixed costs were $1,100,000. What were total production costs? What is the marginal cost per pair? What is the average cost? If the company is considering a one-time order for an extra 10,000, what is the minimum acceptable total revenue from the order. (10 Points)

(Use Excel and Excel Formulas)

Answer 1

We know that the fixed cost does change with the change irrespective of the level of activity . However variable cost change with the change in the level of activity.

Accordingly we can generate the marginal cost statement as above for sale of 100000 rackets.

Particulars	Costs
Sales
Selling price	180
Units Sold	100000
Total Sales (A)	18000000
Variable costs
Material	39.75
Labour	30.35
Variable cost/ Units( B)	70.1
Units Produced (C)	1,00,000
Total Variable cost ( B*C) =D	70,10,000
Contribution( E)	1,09,90,000
Fixed costs (F)	11,00,000
Profit( E-F)	98,90,000

Average cost ( D+F)/100000

81.10

Note - Assumed that total production = Sales

Marginal cost is the increase in the production cost for change in 1 unit of production.

Hence Marginal cost here denotes the variable cost

Hence , Marginal cost = 70.1 that means to produce one additional unit we need extra cost of 70.1

Average cost is the total cost total cost divided by the total units produced

= (70,10,000 + 11,00,000)/100000 = 81.1.

Before we know the minimum acceptable revenue , It is to be noted that after the firm achieves the break even point( The unit of sales where fixed cost = Contribution or the firm makes no profit and no loss). The firm has to recover only the variable cost

Hence Additional Revenue per unit is the Additional cost per unit

That is Additional revenue is to be equal to marginal cost

Hence Aditional revenue per unit is = $70.1/ Unit

So the minimum acceptable revenue = 70.1 * 10,000 = 7,01,000