Global Business 3rd Edition by Mike Peng

Exercise 9

Suppose in Country A, a widget firm has absorbed all of its fixed costs (costs that do not change with the level of output such as rent), and now all additional costs are only variable costs-costs that do vary with the level of output such as raw materials. In Country A, the price was enough to cover both its fixed cost of $100 and variable cost of $10 and provide an additional profit of $10. It sold only one for a price of $120. Suppose the widget firm received an order from Country B for one widget and indicated that it would pay $20-enough to cover the variable cost of $10 and provide a $10 profit. If the widget firm agrees, it will have total costs for the two widgets (one sold in Country A and one sold in Country B) of $100 fixed costs plus $20 variable cost-i.e., an average total cost for two units of $60. If it sells the widget to Country B for $20, will it be selling it above or below cost? Explain.