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Managerial Accounting. Relevant CostRick Nicotera sells special terra-cotta trays that are perfect for planting in dry climates. The trays have per-unit variabl

Rick Nicotera sells special terra-cotta trays that are perfect for planting in dry climates. The trays have per-unit variable production costs of $15 and fixed costs of $4 (based on 8,000 units). Rick's company has excess capacity to accept a special order of up to 500 units.
 
What is the minimum price that could be charged for this special order?
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Brad M. | Professional Tutor: Ultra Streamlined Math - Physics - AccountingProfessional Tutor: Ultra Streamlined M...
4.9 4.9 (217 lesson ratings) (217)
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Hey Ahmed -- businesses will accept orders that cover Ave Variable Costs.  
The reasoning is that the fixed costs are already committed, and any gain over AVC  
can be used to "chip away" at fixed costs. This why restaurants/bars offer specials  
low enough to cover the wage/food costs for that night when the rent's already paid.  
==> accept Pmin = AVC = $15 ... Best regards, sir, :)
Jim S. | Physics (and math) are fun, reallyPhysics (and math) are fun, really
4.7 4.7 (141 lesson ratings) (141)
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If you sold the 500 units at a price that was equal to the total cost i.e. 19x500 = $9500 Rick would cove his cost and keep the plant working but would make $0 margin. I would say this is the minimum price.