Berditzman Shoe C. will produce a custom-style shoe if the order size is large e

Question

Berditzman Shoe C. will produce a custom-style shoe if the order size is large enough to provide a reasonable profit. For each custom-style order the company incurs a fixed cost of $1,000 for the production setup. The variable cost is $30 per pair and each pair sells for $40.
a. Does this production setting exhibit economies or diseconomies of scale? Justify your answer.
b. What is the break-even quantity level?
c. Suppose that they have decided to accept a custom-style order that has sufficient volume to exceed break-even and have already set up for production. The customer now indicates that they are only willing to pay $31.99 per pair of shoes. i.What is the economic profit/loss associated with this order if you proceed?
ii.Should you proceed or back out of this transaction?
Berditzman Shoe C. will produce a custom-style shoe if the order size is large enough to provide a reasonable profit. For each custom-style order the company incurs a fixed cost of $1,000 for the production setup. The variable cost is $30 per pair and each pair sells for $40.
a. Does this production setting exhibit economies or diseconomies of scale? Justify your answer.
b. What is the break-even quantity level?
c. Suppose that they have decided to accept a custom-style order that has sufficient volume to exceed break-even and have already set up for production. The customer now indicates that they are only willing to pay $31.99 per pair of shoes. i.What is the economic profit/loss associated with this order if you proceed?
ii.Should you proceed or back out of this transaction?

Explanation / Answer

a.this production setting exhibit economies of scale because increasing the number of shoes per order does not increase the per unit cost.

b.break-even quantity level = 1000/(40-30) =100 pair of shoes

c Let the volume initially ordered is 101 shoes

i)economic profit/loss = 101*(31.99-30) -1000 =-$799.01

ii) If you do not proceed then you will incur a loss of $1000 which you have spent onset up for production. Threfore you should proceed with the transaction to minimise the losses

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