Question

Teddy, Inc. sells donuts. They pride themselves on fresh ingredients and products, and therefore bake the donuts fresh each morning.The average selling price is $1 per donut. Average variable costs are $.40 per donut. When producing at full capacity – 1,000 donuts per day – the fixed cost is $.10 per donut.

Just before closing, a tour bus arrives and the driver offers to purchase 100 donuts that are already made for $40. As he is just about to lock up, Teddy's manager accepts the offer.

Considering a financial perspective, which of the following is true?

Teddy's manager is incorrect, as the special offer price is below per unit costs.

Teddy's manager is correct, and he probably would have accepted a lower price.

Teddy's manager is incorrect, as the special offer price is below normal revenues.

Teddy's manager is correct, but this is the lowest price he could accept.

Joseph Company incurs per-unit costs of $11 in variable costs and $4 in fixed costs to produce its main product, which sells for $24. A new customer in the market, Katherine, offers to purchase 2,500 units at $16 each.

If the special offer is accepted, the units sold to Katherine would have to be produced with capacity that was otherwise going to be used to produce units sold to other customers.

Which of the following statements are true? (Check all that apply.)

The sales price of $24 is irrelevant.

The fixed costs of $4 are irrelevant.

The lost sales to other customers are relevant.

The lost sales to other customers is irrelevant.

Answer 1