Question

Pete’s Boxes manufactures 12x12x12 cardboard boxes to the public.   It sells its cardboard boxes online via its website with a “normal” price of $0.85 each.

As the manager of Pete’s Boxes, you have calculated the following unit costs per cardboard box:

Rent            $0.05

Cost of materials       $0.10

Hourly wages       $0.25

Management Salaries  $0.10

Shipping          $0.05

Pete’s Boxes recently learned of an opportunity to sell 100,000 of its cardboard boxes to Amazon for a price of $0.55 each.  However, Pete’s Boxes will incur an additional shipping cost of $0.05 per box.

(1)   Assuming that Pete’s Boxes has the capacity to manufacture 100,000 additional boxes and this will not affect its online sales, should Pete’s Boxes accept the Amazon order? Why?

(2)    Now, suppose that Pete’s Boxes will not be able to meet all of its online orders and on line orders will decrease by 25,000 boxes.   This decrease is a one-time decrease and will not affect future online orders.  Should Pete’s Boxes now accept the Amazon order based on this revised information? Why?

Answer 1

As Pete has the Utilization Capacity of 100,000 Units he should accept the order because

a) The increase in Cost is $.05 which will still give him $ 0.2 profit on every sale

b)Even as the orders decrease the Marginal Utilisation of the Manufacturing capacity is positive so as a one time hit in the sales figures, can be ignored

Fixed Cost	Per Unit	Per 100000 Unit
Rent	0.05	0.05
Hourly Wages	0.25	0.25
Mgmt. Salraies	0.1	0.1
Variable Cost
Cost of Mat.	0.1	10000
Shipping	0.05	10500
Total	0.55	0.6