## Problem P1-6 Solution

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ProblemP1-6 Solution

P1-6Solution

Questiona

Fixedcost of producing tiger head cover

Currentproduction is 500 head covers at a cost unit of 3.50 euros

Totalcost is 500 units * 3.0 euros = 1750 euros

Totalcost inclusive of additional 100 unit, is:

Totalunits is 500 + 100 = 600 units

Therefore,total cost is 600 units * 3.10 euros = 1860 euros

Differencein total cost is 1860 euros – 1750 euros = 110 euros

Unitvariable cost for the additional 100 units is 110/100 = 1.1 euros

AFC+ AVC = AC

i.e.TFC/500 units + 1.10 euros = 3.50 euros

(3.50euros – 1.10 euros)*500 units = TFC

Thereforetotal fixed cost = 1200 euros

Questionb

Tomaximize on the firms value should GS accept Kojo’s offer? GSshould accept the offer.

Kojoseeks to purchase 100 head covers for 2 euros from GS each week.Revenue to GS is 100 units * 2 euros = 200 euros

Thecosts incurred to produce additional 100 cover is 110 euros

Thedifference in sales revenue and cost to produce 100 head covers is200 euros – 110 euros = 90 euros

Todeliver 100 units, GS can make 90 euros each week, therefore suitablefor the company to accept Kojo`s offer.

Questionc

Factorsto consider before making a decision to accept Kojo’s offer

1. Foreign expansion growth – Some business opts to establish a base in overseas markets to meet global demand (Sollish &amp Semanik, 2011). GS Golf Specialties Company should give deep thoughts as to whether it has adequate resources to penetrate the foreign market. However, the company can produce additional 100 units for Kojo distributors.

2. Profits generated – the motive of profit aspect drives most organizations purpose. Transacting in both domestic and foreign markets will guarantee high returns compared to when transacting in the local markets only. GS should be able to analyze carefully and estimate profits generated while transacting in the local markets as well as when transacting in the foreign markets.

3. Credibility and payment structure – It is important to define the terms and conditions accurately to the payment structure (Sollish &amp Semanik, 2011). The key pointer here is for GS to be able to determine how financially stable Kojo is so as to determine credit capabilities and limit defaulting cases.

References

Sollish,F., &amp Semanik, J. (2011). Strategicglobal sourcing best practices.Hoboken, N.J: Wiley.