lucas runs a small firm that makes dining room tables the tables are largely handmad 611290

Lucas runs a small firm that makes dining room tables. The tables are largely handmade and in a year the following costs are expected to be incurred in the production of 500 tables:

Each table is sold for £300. All of the administration costs are fixed, whereas it is estimated that 50 per cent of the selling and distribution costs are fixed. A supplier has offered Lucas the chance to buy in tables which would be made to Lucas’s specification but could be supplied to him for £200 each. This would give Lucas the chance to close down his production facilities and allow him to concentrate on the selling and marketing of the tables. Would you advise Lucas to accept the offer to buy in the tables or to continue production? Initially, the purchase of tables from the outside supplier might be look like a good idea. The average cost of a table is £212 (£106,000/500 tables). However, this decision requires us not to use the average total (or full) cost, but the marginal cost of each table. If the decision is to be made on financial grounds alone, we should be comparing the marginal cost of each table with the price offered by the outside supplier.