Question

Your accounting department has provided you with the following information about the total cost of producing three potential quantities of a machine glazed paper widely used for the food packaging sector:
220 000 rolls 337 000 rolls 450 000 rolls
Materials RS.562 000 RS.843 750 RS.1 100 000
Depreciation RS.2 000 500 RS.2 000 500 RS.2 000 500
Labour RS.22 000 RS.45 000 RS.45 000
Total Costs RS.2 584 500 RS.2 889 250 RS.3 145 500


The market is flooded with many producers of glazed paper. Your sales department had received enquiry from a reputable firms. specializing in food packaging. After visiting your production facility, the firms. specializing in food packaging has agreed to buy your glazed paper at RS.400 per roll for an order of 220 000 rolls. You must decide whether to sign a contract under these terms or simply shut down your operations. What is your optimal decision?

Answer 1

$Profit=Revenue-Total costs=220 000\times400-2 584 500=85145500$$Profit=Revenue-Total costs=220 000\times400-2 584 500-2889250-3145500=79380750$

The profit will cover all costs for three batches. So the contract must be signed