Question:
You are the general manager of TU modems Inc., and your accounting department has provided you with the following information about the total cost of producing three potential quantities of a commercial-grade modem:
100,000 Units 150,000 Units 200,000 Units
Materials $ 250,000 $ 375,000 $ 500,000
Depreciation $ 900,000 $ 900,000 $ 900,000
Labor $ 10,000 $ 15,000 $ 20,000
Total costs $ 1,160,000 $ 1,290,000 $ 1,420,000
The market is saturated with modems, and your sales department has been able to identify only one potential buyer of your modems. This customer has numerous alternative options and as a result is only willing to pay $300 per modem for an order of 100,000 modems. You must decide whether to sign a contract under these terms or simply shut down your operations. What is your optimal decision?