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Economics

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Jan 9, 2024

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Question 2: Should you reduce the price or increase advertising? The selling price is $20/unit, variable costs are $10/unit, and fixed costs are $3,000 in total. Sales volume decreased to 200 units because of a recession. You are considering two options to stimulate sales: (1) Reduce the price to $18/unit. This will increase sales volume by 20%. (2) Buy additional advertising for $300 and keep the original price. This will increase sales volume by 20%. Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising. status quo (1) reduce the price (2) increase advertising Volume in units @l v m 4 m < Revenue $/4000| $14,320| $|4,800| Variable costs $2000| $[2400| $2400| Contribution margin $2000| $(1920| $2400| Fixed costs $3000| $(3000| $3300| Profit* $|-1000] $|-1080] $[-900] * enter losses as a negative number: e.g., a loss of $500 should be entered as -500, not as (500) or ($500). What should you do? Reduce the price © Increase advertising Do nothing

Question 3: Make versus buy You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $75 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $20 direct labor $40 variable overhead $10 fixed overhead $10 total $80 If you outsource the production of compressors (the and profit? First, compute variable costs under MAKE versus BUY: MAKE BUY unit ve [[70] 75] v total vC||70000] 75000] how much each amount changes if you outsource Incremental revenue o] v buy option) in the short term, how will this choice affect your costs If you outsource (BUY), the incremental revenue, costs, and profit are: Incremental VC |5000| v 4 Incremental CM |-5000| v 4 Incremental FC @] v Incremental profit |;5000J 4 Enter negative amounts with a minus sign, i.e., -1,000 not ($1,000). Question 4: Choosing the product mix when capacity is in short supply You have three product lines: Basic, Premium, and Supreme. You have limited capacity of 300 machine hours. You face excess demand for all three products (assume unlimited demand for simplicity). Basic Premium Supreme Price per unit $4,200 $9,800 $14,000 Unit variable cost $1,400 $2,800 $4,200 Machine hours per unit 1 2 4 Compute the CM per unit of capacity (i.e, per machine-hour) for each product: Basic = $[2800| » per hour Premium = $(3500| # per hour Supreme = $[2450| o» per hour Which product(s) should you make? Make all three products to take advantage of the high demand Supreme only Basic only © Premium only v How many units of each product should you make? (enter 0 for products that you do not want to make) Basic = @ units Premium = « units Supreme = E « units Hint if you get stuck: You have 300 machine hours.

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