According to a news agency article, a particular model of car (Sundra) costs $65,000 to produce, while its market price is $34,000. As a result, the author of the article concluded that the automobile company would be losing $31,000 on each Sundra it builds and recommended that the automobile company should not be producing more Sundras. A breakdown of the $65,000 figure was provided as follows:
1. Incurred development costs of about $4.5 billion spread out over the 100,000 cars produced to date, for an average of $45,000 per car; and
2. Cost of building an additional car: $20,000.
Do you agree with the author's recommendation that the automobile company should not be producing more Sundras? Fully explain and justify your answer. (Hint: Define, identify and use the concepts of sunk costs, marginal cost and marginal revenue)
According to a news agency article, a particular model of car (Sundra) costs $65,000 to produce, while its market price is $34,000. As a result, the author of the article concluded that the automobile company would be losing $31,000 on each Sundra it builds and recommended that the automobile company should not be producing more Sundras. A breakdown of the $65,000 figure was provided as follows:
1. Incurred development costs of about $4.5 billion spread out over the 100,000 cars produced to date, for an average of $45,000 per car; and
2. Cost of building an additional car: $20,000.
Do you agree with the author's recommendation that the automobile company should not be producing more Sundras? Fully explain and justify your answer. (Hint: Define, identify and use the concepts of sunk costs, marginal cost and marginal revenue)
