Natalia Martinez is an entrepreneur and she developed a brand for a bag named Rocko. Rocko Handbags Limited generated quality packs and satchel with a European essence for American and Canadian market. The Brand is exceptionally prominent to the adolescent. To make her item universal Natalia needs to enter in the Asian Market followed by Latin American market first. At this stage she gains an offer to supply 20000 units of Pippi bag at $8/unit from a major retail store of Brazil. The offer is too low that it is under the production cost whereas her cost of production is $10/unit. She was crazy to enter into the Latin American market yet as per her bookkeeper, she is confronting a situation that whether, it is a better choice to enter into a new market at this point of time or not.
Will Natalia lose money if she accepts the Brazilian offer? Explain
From normal point of view, it is showing that Natalia will lose $2/unit. But there are some points mentioned in the case and by judging those facts it can be said that she will not lose $2 in total. In the case it is clarified that the production house is operating at 70% capacity and it could produce more at that time. Total amount of fixed cost is allocated per unit is measured by the capacity utilization of a production house. If the capacity utilization increases, automatically the fixed cost per unit will be decreased. According to my calculation if Natalia increase the capacity utilization to 100% she can produce (100000*100)/70= 142850 units (approximate) where per unit cost will be (500000/142850) = 3.5+5 = $8.50/unit. Moreover, if she wants to produce 120000 units then the calculation will be (500000/120000) = 4.17+5= $9.17/unit. Therefore, in both the situations she will lose money initially.