A company manufactures and sells a single product. The variable cost of the product is Rs 2.50 per unit and all production each month is sold at a price of Rs 3.70 per unit. A potential new customer has offered to buy 6,000 units per month at a price of Rs 2.95 per unit. The company has sufficient spare capacity to produce this quantity. If the new offer is accepted, sales to existing customers are expected to fall by two units for every 15 units sold to the new customer.
Required:
(a) Should the new offer be accepted and if accepted what would be the overall increase in monthly profit.
(b) In the short-term decision-making context, which ONE of the following would be a relevant cost?
- Specific development costs already incurred.
- The cost of special material which will be purchased.
- The original cost of raw materials currently in inventory which will be used on the project.
(c) Briefly illustrate what you understand by the term "sunk cost".