Snyder Corporation manufactures small, compact global positioning satellites. All of the personnel involved in their production are so highly qualified that the company will retain them even if production levels decline. The product requires a great deal of research and development expenditures, as well as prolonged quality testing. The cost breakdown for a satellite is:
|
Variable Costs |
Overhead Costs |
|
|
Components |
$125,000 |
|
|
Assembly staff |
$400,000 |
|
|
Quality control staff |
150,000 |
|
|
Research staff |
200,000 |
|
|
Building overhead |
75,000 |
|
|
Manufacturing supervision |
50,000 |
|
|
Total |
$125,000 |
$875,000 |
The totally variable cost of a single satellite is only $125,000, so Snyder could theoretically make money by pricing its satellites in short term pricing situations for any amount over $125,000. However, it would soon go out of business if it were to do so for an extended period of time, since the company must also pay for a significant amount of overhead costs. IfSnyder hopes to be in business for any length of time, it will need to use the long term cost per satellite of $1 million as the minimum threshold for setting prices (not including a profit margin).