Question: Our company is producing 100,000 units per year and it is operating at about 70% of capacity. Our average total cost of production is $2.00 per unit.
Experience shows that the average total cost drops somewhat as output is expanded beyond 100,000 but rises again if output is expanded above 120,000 units.
The normal wholesale price (i.e. the price that our company sells its product for) is $2.50 per unit. We have received an order from a private-label vendor for 10,000 units at a price of $1.60 per unit. Because it is a private-label vendor, this sale would not interfere with our existing sales since it will not look like we are selling the same item at a lower price somewhere else.
If we accept this order, it would expand our production to 110,000 units at which point our average total cost per unit would be $1.95. Should we accept this order even though they are offering us a price far below our average total cost? Please explain with specific numbers and show your calculations.